Monday, March 10, 2008

Percent of Sales Method for Estimating Bad Debts Expense

Percent of Sales Method to Calculate Debt Expense


Bad debts expense is calculated as a straight percentage of the current years credit sales. The percentage is based on prior years experience, modified for changes in current year. Any existing balance in the Allowance for Doubtful Accounts is NOT considered in calculating Bad Debts Expense.

To record bad debt expense use the following equation:

Current Period Sales X Bad Debt %

= Estimated Bad Debts Expense





An Internet Service Provider estimates its bad debts expense to be 2 percent of credit sales. Their credit sales for 2006 were $1,000,000. During the year 2006, the Internet Service Provider wrote off $18,000 of uncollectible accounts.

Their Allowance for Doubtful Accounts had a $15,000 balance on January 1, 2006. On its December 31, 2006 balance sheet, what amount should the ISP enter as a journal entry for Allowance for Doubtful Accounts?





Answer: $17,000

Additional Links to Accounting Tutorials:

Direct Write Off Method for Bad Debt

What is Bad Debt?

3 comments:

Anonymous said...

SHOW YOUR MATH

Anonymous said...

1,000,000 * .02 = 20000

20000 + 15000 (from 2006 balance) = 35000

35000 - 18000 = 17000

hooray for all! =)

Anonymous said...

Nope. That's not right. It's this:

The allowance for doubtful accounts at the beginning of the year is recorded as: 15,000.

The allowance for doubtful accounts at the END of the year should be this: 1) the 20,000 that is your bad debt expense estimate, done via the percent of sales or "income statement" method, by calculating the 2% of your 1,000,00 accounts receivable. 2)The deduction of 18,000 from your credit balance of the allowance for doubtful accounts (don't need to be there no more). So you're credit balance for the allowance for doubtful accounts must be: the 20,000 estimated bad debt expense - the 18,000 write off = 2,000.

However, you have a DEBIT balance in the allowance for doubtful accounts (and of 15,00)

So all you need to do is credit the allowance such a number that will bring the credit balance to 2,000,

That number is 17,000.

Who ever posted this question, thanks for doing so. We'd like it if you provided your mathwork too!

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