What is the journal entry for the allowance-credit sales method?

The allowance-credit sales method involves estimating bad debts based on credit sales and creating an allowance for doubtful accounts. The correct journal entry reflects the recognition of bad debt expense when recording this estimate.

Specifically, when applying the allowance method, a company calculates its estimated bad debts and records them in the same period as the related sales revenue, adhering to the matching principle of accounting. This ensures that expenses are recognized in the same period as the revenues they generate.

In the correct entry, Bad Debt Expense is debited to reflect the increase in expenses due to the estimated uncollectible accounts. The corresponding credit is made to Allowance for Doubtful Accounts, which is a contra asset account that records the estimated uncollectible receivables. This approach does not directly affect Accounts Receivable but rather adjusts the allowance for potential losses associated with those receivables.

This method provides a more accurate depiction of the financial position by reflecting the anticipated losses on an income statement and balancing the accounts appropriately on the balance sheet.