Bad debts expense1/30/2024 ![]() The percentage of sales method is sometimes referred to as an income statement approach because the only number being estimated (bad debt expense) appears on the income statement. This alternative computes doubtful accounts expense by anticipating the percentage of sales (or credit sales) that will eventually fail to be collected. As long as company officials obtain sufficient evidence to support the reported numbers, either way can be applied. Over the decades, two different approaches have come to predominate when predicting the amount of uncollectible accounts. However, estimations can be made by any method that is considered logical. How is the estimation of uncollectible accounts derived each year?Īnswer: Much of financial accounting is quite standardized. No entry has yet been made for the Year Two bad debt expense. According to the ledger balances, sales on credit for the year were $400,000, remaining accounts receivable amount to $160,000, and a $3,000 debit sits in the allowance for doubtful accounts. Question: The final step in reporting receivables at the end of Year Two is the estimation of the bad accounts incurred during this second year and the preparation of the related adjusting entry. Understand the purpose and maintenance of a subsidiary ledger.Explain the reason that bad debt expense and the allowance for doubtful accounts will normally report different figures.Estimate and record bad debts when the percentage of receivables method is applied.Estimate and record bad debts when the percentage of sales method is applied. ![]() At the end of this section, students should be able to meet the following objectives:
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