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    Estimating Bad Debts Based On Sales

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    Adugna Megenasa
    Estimating bad debts as a percentage of sales or receivables is consistent with the matching concept. The bad debt expense is recorded in the same period as the associated revenue. The journal entry debits bad debt expense and credits allowance for doubtful accounts. The amount credited/debited adjusts the allowance account to the estimated ending balance, considering its current balance. Examples show the calculations and entries to estimate bad debts as 3% of sales and 1.5% of receivables.

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    Estimating Bad Debts Based On Sales

    Uploaded by

    Adugna Megenasa
    43 views2 pages
    Estimating bad debts as a percentage of sales or receivables is consistent with the matching concept. The bad debt expense is recorded in the same period as the associated revenue. The journal entry debits bad debt expense and credits allowance for doubtful accounts. The amount credited/debited adjusts the allowance account to the estimated ending balance, considering its current balance. Examples show the calculations and entries to estimate bad debts as 3% of sales and 1.5% of receivables.

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    Estimating Bad Debts Based on Sales

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    Estimating bad debts as a percentage of sales or receivables is consistent with the matching concept. The bad debt expense is recorded in the same period as the associated revenue. The journal entry debits bad debt expense and credits allowance for doubtful accounts. The amount credited/debited adjusts the allowance account to the estimated ending balance, considering its current balance. Examples show the calculations and entries to estimate bad debts as 3% of sales and 1.5% of receivables.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    43 views2 pages

    Estimating Bad Debts Based On Sales

    Uploaded by

    Adugna Megenasa
    Estimating bad debts as a percentage of sales or receivables is consistent with the matching concept. The bad debt expense is recorded in the same period as the associated revenue. The journal entry debits bad debt expense and credits allowance for doubtful accounts. The amount credited/debited adjusts the allowance account to the estimated ending balance, considering its current balance. Examples show the calculations and entries to estimate bad debts as 3% of sales and 1.5% of receivables.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Estimating Bad Debts Based on Sales

    Estimating bad debts as a percentage of sales is consistent with the matching concept in that the bad debt
    expense is recorded in the same time period as the associated revenue.

    Note: When using the estimate based on sales, the entry for bad debt expense is made for the amount of
    the calculation.

    Examples: Jones Company has net credit sales of $75,000 and estimates that bad debts are approximately
    3% of net credit sales. The yearend balance in accounts receivable is $200,000.

    > Record the entry assuming that the allowance account currently has a credit balance of $300. The
    journal entry to record the bad debt would be as follows:

    Debit Credit
    ------- -------
    Bad debt expense (75,000 x 3%) 2,250
    Allowance for doubtful accounts 2,250
    After the above entry, the allowance account would have a balance of $2,550 (i.e., $2,250 + $300). The
    net realizable value of account receivable after adjustment would be $197,450 (i.e., $200,000 - $2,550).
    > Record the entry assuming that the allowance account currently has a debit balance of $300. The
    journal entry to record the bad debts would be as follows:

    Debit Credit
    ------- -------
    Bad debt expense (75,000 x 3%) 2,250
    Allowance for doubtful accounts 2,250
    After the above entry, the allowance account would have a balance of $1,950 (i.e., $2,250 - 300). The net
    realizable value of accounts receivable after adjustment would be $198,050 (i.e., $200,000 - $1,950).

    Estimating Bad Debts Based on Receivables

    The estimate based on receivable could be one that uses aging or single calculation base total receivables
    as shown below:

    Note: When using the estimate based on receivables, the entry for bad debt expense must consider the
    current balance in the allowance account. The amount of the bad debt expense for the entry is the amount
    that is needed to bring the balance in the allowance account to the amount of the desired ending balance.
    The ending balance must be a credit balance.
    Examples:
    O'Reilly Company has an accounts receivable balance of $200,000 and estimates that bad are
    approximately 1.5% of accounts receivable.
    > Record the entry assuming that the allowance account currently has a credit balance of $300. The
    journal entry to record the bad debts would be as follows:

    Debit Credit
    ------- -------
    Bad debt expense ((200,000 x 1.5%) - 300) 2,700
    Allowance for doubtful accounts 2,700
    After the above entry, the allowance account would have a balance of $3,000 (i.e., $200,000 *1.5%). The
    net realizable value of accounts receivable after adjustment would be $197,000 (i.e., $200,000 - $3,000).
    > Record the entry assuming that the allowance account currently has a debit balance of $300. The
    journal entry to record the bad debts would be as follows:

    Debit Credit
    ------- -------
    Bad debt expense ((200,000 x 1.5%) + 300) 3,300
    Allowance for doubtful accounts 3,300
    After the above entry, the allowance account would have a balance of $3,000 (i.e., $200,000 x1.5%). The
    net realizable value of accounts receivable after adjustment would be $197,000 (i.e.,
    $200,000 - $3,000).

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