Question: To carry this illustration one step further, assume that $400,000 in new credit sales are made during
Year Two while cash of $330,000 is collected. Uncollectible receivables totaling $10,000 are written off in
that year. What balances appear in the various T-accounts at the end of the subsequent year to reflect sales,
collections, and the write-offs of receivables?
Answer: Sales and bad debt expense were reported previously for Year One. However, as income statement
accounts, both were closed out so as to begin Year Two with zero balances. They are temporary accounts. In
contrast, accounts receivable and the allowance for doubtful accounts appear on the balance sheet and retain their
ending figures going into each subsequent period. They are permanent accounts. These two T-accounts will still
show $100,000 and $7,000 respectively at the beginning of Year Two.
Assuming that no adjustments have yet been made, these four accounts hold the following balances at the end of
Year Two based on appropriate journal entries. Notice that the expense account remains at zero until the end-of-
year estimation is made and recorded.