The Allowance Method of Accounting for Bad Debts

May 19th, 2015
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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.

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The Allowance Method of Accounting for Bad DebtsA. Estimating Bad Debts Based on SalesEstimating 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. Net credit sales x Bad debt percentage ---------------------- = Bad debt expense 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 year end 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 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 $2,550 (i.e.,

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