Raining Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $200,000 and credit sales are $1,300,000. An aging of accounts receivable shows that approximately 10% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment?

Raining Company and Tanning Company

An Uncollectible Expense of $17,500 will be credited to the Allowance for Doubtful Accounts to bring the credit balance to $20,000.

Step-by-step explanation:

Since the accounts receivable balance is $200,000, there is nothing to do with the credit sales of $1,300,000.

The Allowance for Doubtful Accounts after adjustment should have a credit balance of $20,000 ($200,000 x 10%).

With a credit balance of $2,500 before adjustment, it will be adjusted (credited) with Uncollectible Expense of $17,500.  This brings the adjusted balance to $20,000 which represents 10% of the accounts receivable balance of $200,000.

Note that the Allowance for Doubtful Accounts is a contra (credit) account to the Accounts Receivable account.  This allowance is a way to prudently provide for credit risk as required by Generally Accepted Accounting Principles.