Under the allowance method of accounting for bad debts, when a specific account becomes uncollectible and must be written off, what is the correct journal entry?

Introduction / Context:
When companies sell on credit, some customers may never pay. Accounting standards require a realistic estimate of such losses using the allowance method. Under this method, an Allowance for Doubtful Accounts is created in advance. Later, when a specific customer account is identified as uncollectible, it must be written off against this allowance. This question tests your understanding of the correct journal entry for that write off.

Given Data / Assumptions:

• The company uses the allowance method, not the direct write off method.
• An estimated Allowance for Doubtful Accounts has already been created earlier.
• A specific customer's account is now confirmed to be uncollectible.
• The write off should not create a new expense; it should adjust the existing allowance and receivable.

Concept / Approach:
Under the allowance method, Bad Debt Expense is recognised in advance based on an estimate of future uncollectible amounts. This creates a credit balance in Allowance for Doubtful Accounts. When a specific account is written off, the company reduces both Accounts Receivable and the Allowance. This is done by debiting Allowance for Doubtful Accounts (reducing the allowance) and crediting Accounts Receivable (removing the customer balance). As a result, total receivables and the allowance both decrease, but there is no new impact on Bad Debt Expense at the time of write off.

Step-by-Step Solution:
Step 1: Recall that earlier, the company debited Bad Debt Expense and credited Allowance for Doubtful Accounts to build up the allowance balance. Step 2: Now, when a particular customer is determined to be uncollectible, the company must remove that customer's balance from Accounts Receivable. Step 3: To remove the receivable, credit Accounts Receivable with the amount being written off. Step 4: To offset this credit, debit Allowance for Doubtful Accounts, thereby using up part of the previously created allowance. Step 5: The resulting entry is: Debit Allowance for Doubtful Accounts; Credit Accounts Receivable.

Verification / Alternative check:
After the write off, the net realisable value of Accounts Receivable (gross receivables minus allowance) remains unchanged because both gross receivables and the allowance decrease by the same amount. This confirms that the write off does not affect the income statement again; the expense was already recognised earlier when the allowance was created. If we debited Bad Debt Expense again at this stage, we would double count the expense, which is incorrect under the allowance method.

Why Other Options Are Wrong:
Debiting Bad Debt Expense and crediting Accounts Receivable corresponds to the direct write off method, not the allowance method. Debiting Accounts Receivable and crediting Allowance for Doubtful Accounts would increase receivables, which is the opposite of what we want. Debiting Sales Revenue and crediting Accounts Receivable reduces revenue rather than using the allowance and is not the standard treatment for bad debts.

Common Pitfalls:
Students often confuse the initial estimation entry with the subsequent write off entry. Another common mistake is thinking that bad debt expense must be debited every time an account is written off. Under the allowance method, the key is to remember that the expense is recognised earlier, when the allowance is adjusted, so the write off only affects the balance sheet accounts. Keeping a clear timeline of these events helps prevent errors in exam questions and practical accounting work.

Final Answer:
Under the allowance method, when a specific account is written off as uncollectible, the correct entry is to debit Allowance for Doubtful Accounts and credit Accounts Receivable.