What is the double entry for recording a doubtful debt?

To determine the appropriate double entry for recording a doubtful debt, it's essential to understand the nature of doubtful debts and the role of the allowance for doubtful debts in accounting.

When a business recognizes that a specific receivable may not be collected, they need to reflect this potential loss in their financial statements. This is usually done through an adjustment to the allowance for doubtful debts. The allowance is a contra-asset account linked to accounts receivable, designed to account for estimated uncollectible amounts.

In the correct entry, debiting the allowance for doubtful debts adjustment (on the Statement of Profit or Loss, SPL) reflects the expense associated with estimating uncollectible accounts. This expense decreases net income, acknowledging the potential loss from receivables that are unlikely to be collected.

The credit to the allowance for doubtful debts (on the Statement of Financial Position, SFP) increases this allowance account, which offsets the total receivables balance, providing a more accurate picture of the company's collectible assets.

This entry is crucial because it adheres to the accrual basis of accounting, ensuring that revenues and expenses are recognized in the period they occur, even if cash hasn’t actually been exchanged.

The balancing effect of these entries allows the financial statements to give a