 The allowance that's the second or third account on the trial balance third account on the general ledger We are in the debit side. So we are in s12. So within s12, we're gonna say equals point to the 14 7 that's gonna bring the balance of 30 down because that's a credit and we're debiting it which are opposites brings it down to 15 3 then we have the receivable account here Receivable count is the second account on the trial balance. We are going to be the second account on the general ledger We are going to credit the receivable. So we are in cell P 20 Equals and then point to that 14 7 that's gonna bring the receivable balance down to 1 million 146 3 if we do something to the receivable balance here We're also gonna have to do that to the subsidiary ledger and so we're gonna scroll down the subsidiary ledger and We determined that the two companies that will be affected on this is P and BD now note that I usually have a formula here to tie out what's gonna happen But in this case, it's because we have the two areas We kind of have to just hard code the number in here and that is because we're with this 14 Of course 14 7 is accounting for this 6 7 and this 8,000 that need to go down So I'm gonna hard-code this in there in cell X 37 negative 6 7 Bringing the balance down to zero and then in cell a b 31 negative 8,000 and of course if we I'm gonna hold down control and Highlight those two cells and excel will add that up. That's the 14 7 That's this 14 7 if we scroll down here We can see that if we add up all of them all the customers They owe us one million one forty six three in the accounts receivable subsidiary ledger Which ties out to the accounts receivable general ledger here Which ties out to the accounts receivable on the trial balance. All right. We got one more transaction I'm gonna make this a bit larger on the taskbar back up to a hundred percent scrolling over. We're now on 1231 says see analysis of receivable aging Adjust the allowance account accordingly. All right, so now we're at the end of the time period and what we're gonna do is we're going to say of The current revenue that we have made and in this case we have 378 how much of that do we think will be uncollectible and there are two ways to think about this We could think about the revenue and try to multiply that by the amount of revenue that was sold on account that we think will be Uncollectible and a lot of places that I have seen have looked more on the balance sheet We can also look on the balance sheet and say hey, well, these are the receivables. We have right now Let's look at how old those receivables are and come up with some type of estimate in terms of how much of those receivables will be uncollectible and then by adjusting the allowance account to Match the account that we will be uncollectible. We will write off the bad debt expense that it will take to get to that amount So note that what we already have here We got 15 3 that we think are going to be uncollectible because basically we overestimated the amount that would be Uncollectible from the prior period We thought that we started out with in the allowance account Thinking that we were going to not receive 40,000 for this time period and we still have 15 3 that We thought we were not going to receive that That we are still good. We haven't written that off yet And so therefore once we come up with how much of this we do not believe we're going to be receiving We will then record this or adjust this to that number So let's show what I mean This is kind of the idea of where we might come up with this number what that number should be So if we have an aging note that what we have here is 1 million 146 3 in the receivable if we broke that out to some type of aging Meaning we're trying to find out how much of the receivables are still due how much are over 30 days between 30 and 60 6090 over 90 now if we looked and broke out the data in this format then and Tied out the total the total receivables then tie out to the amount on the trial balance 1 million 146 3 Then we could come up with some kind of estimate and we would say well If it's still kind of current then we think that 2% will not be corrected be collected The longer it stays Outstanding then the higher the percent that we believe would be not collected. So we're going to say for 10 95 you might be asking where did you come up with these numbers and and that's what those would be come up with past experience past experience would tell us that How much of the account would be uncollectible then we can come up with an estimate and say okay Well, if we add these up, we're gonna say that of the receivables of 1 million 146 3 Based on this estimate. We think that fifty thousand four thirty seven will be uncollectible So we think that that's what the receivable account the uncollectible account should be fifty thousand four thirty seven and if we scroll over here and See what we have in it right now We have 15 three of a credit So 15 three of a credit. We want to be fifty thousand four thirty seven Therefore, I'm going to subtract that minus 15 three. We're going to need another 35 137 in order to get this 15 three up to the amount that we believe is going to be Uncollectible based on our aging calculation that we just looked at for the receivable account and so that 35 137 is What we're going to have to increase this receivable account by so this allowance account has a credit balance in it We're going to make it go up So we're going to do the same thing to it which in this case would be a credit So I'm going to copy the the receivable the allowance going to put that on the bottom here's the date We're going to put it on the bottom paste it one two three and the calculation that we have here 35 137 we're gonna put that credit negative 35 137 And then we're going to have to debit the same amount so 35 137 and then of course, what will the debit be and the debit is not going to be to the Receivable because we don't know who's not going to pay us yet But we do we're estimating how much of this receivable will not be paid notice it if we took it out of the receivable we'd have to basically Go to the subsidiary ledger and try to estimate who's not to be paid in order for it to tie out We don't know What we're doing is we're going to expense that amount right now because that amount should be coming out of the current revenue So the idea is we're backing into the the amount of this revenue that we believe are going to be Uncollectible we don't know who's not going to pay us, but we know from past experience that This amount probably will not be paid and we need to disclose this to our readers It would be unfair for our to tell our readers that we have receivables of this amount when we know from past experience that It's really lower than that We're not going to get that much money and it would be unfair to our readers to tell them that we made this much money When we know that that revenue is too high really because some of the payments will never be received So we need to take that down. So the amount will be here to bad debt expense. You also might be thinking Why don't we debit revenue to take the revenue down because the revenue is overstated. That's what we're really saying We're saying hey, we made a sale, but we didn't really make a sale because we're not going to get paid on it So why don't we reduce revenue and the same idea? We never reduce revenue really? Revenue generally only goes up. We make up this other account It's basically taking down the revenue or matching the expense of people that will not pay so we're going to copy this and We're gonna paste this down here in c21 right-click and paste it one two three And then I'm gonna make this a little bit smaller in the task bar back down to 80 So we can post this out and see if it does what we expect it to do What do we expect it to do well? We expect this account here the allowance account the allowance account here to go from 15 3 to our estimate that we came up here to 250,000 437 all right, that's what we wanted to do. So let's post this out So we will then first go to the bad debt that debt is here It's way down here on our trial balance. Therefore. It's gonna be in the dark blue area. It's way over here. It's in a Nine so we can barely see it, but we are in the debit half of it I'm just gonna select equals and then point to that 35 137 when we hit enter it's gonna increase the bad debt expense We'll see it increase here, and we'll also see the net income go down All right, so there it is here puts us out of balance and net income went down meaning net income is the Credit of revenue minus that expense took it down because we reduced it by the amount of revenue that we don't think we're gonna get That 35 137 then we're gonna post the other side to the allowance account So the allowance is here at the allowance is here on the trial balance the allowance is here on the general ledger Here on the general ledger. We are in cell t13 and We're gonna select equals and then point to that 35 137 what's gonna happen? This is a credit. This is a credit. It's gonna go up in the credit direction from 15 3 to 50,000 437 that we can see here as well and that ties out to our estimate here So I'm gonna scroll back over here So there's our activity. So now we think that we are going to have receivables of 140 1 million 146 300 but 50,000 347 of those are going to be uncollectible. How do we know it's just an estimate? We had an estimate from the prior period, but we need to make that estimate because it would be Best for our reader to understand that based on past experience. We don't think we're gonna collect that much money We're gonna have to reduce it the net receivable. This minus this is 1,095 863 also on the revenue side, although we made sales of 378,000 we believe that of that those sales on account 35 137 will not be collectible based on past experience We need to report that to our reader and show the net income reduced from this 378 by the 35 137 to a net income of 342 863