Sneaker Supply Co. (a made-up company) sells shoes to stores. It started business on January 1, so A/R and ADA begin at $0.
Based on experience, it expects 2% of each month’s credit sales to be uncollectible, and it records BDE at the end of each month.
January transactions
Jan 5: Sold shoes for $4,000 cash.
Jan 10: Sold shoes to Store A on credit, $6,000.
Jan 20: Sold shoes to Store B on credit, $4,000.
Jan 31: Record bad debt expense: 2% of January’s credit sales.
1. Journal entries for January transactions* Use (+A), (−A), (+R), (+E), (+xA), (−xA).
Date
Account
Debit
Credit
Jan 5
Jan 10
Jan 20
2. Unadjusted T-account for A/R, before the Jan 31 adjustment
A/R (unadjusted)
Jan 10
Jan 20
Unadj. bal.
January credit sales =
BDE = credit sales × 2% =
3. Adjusting journal entry (AJE), Jan 31
Date
Account
Debit
Credit
Jan 31
The cash sale has no collection risk, so it is not in A/R and not in the 2% estimate.
4. Accounts receivable at the end of January
Accounts receivable, Jan 31
Amount
Gross A/R
Less: ADA
Net A/R
* Cost of goods sold entries (Dr CGS, Cr Inventory) are omitted for brevity. See Ch6.
February
February transactions
Feb 8: Sold shoes for $3,000 cash.
Feb 15: Sold shoes to Store C on credit, $8,000.
Feb 20: Store A went out of business. An amount equal to 1% of January’s credit sales is now deemed uncollectible and is written off.
Feb 28: Record bad debt expense: 2% of February’s credit sales.
5. Journal entries for February transactions*
Date
Account
Debit
Credit
Feb 8
Feb 15
Feb 20
Feb 20: 10,000 × 1% = 100 is written off against ADA. No expense is recorded.
6. Unadjusted T-account for A/R, before the Feb 28 adjustment
A/R (unadjusted)
Beg. bal.
Feb 20
Feb 15
Unadj. bal.
February credit sales =
BDE = credit sales × 2% =
7. Adjusting journal entry (AJE), Feb 28
Date
Account
Debit
Credit
Feb 28
8. Put it together: January and February
January
February
BDE for the month
Gross A/R, end of month
Less: ADA, end of month
Net A/R, end of month
* Cost of goods sold entries (Dr CGS, Cr Inventory) are omitted for brevity. See Ch6.