Wize University Introduction to Financial Accounting Textbook > Receivables
Percentage of Sales Method
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Percentage of Sales Method
Some businesses determine the bad debt expense by assigning a percentage of total credit sales that they believe will not be collected.
Characteristics of the Percentage of Sales Method
- Bad debt expense is found by taking a percentage of net credit sales.
- Ending balance of Allowance for doubtful accounts is found by adding bad debt expense to the unadjusted balance of allowance for doubtful accounts.
Wize Tip
Since companies don't typically report net credit sales, you can use net sales in its place.
Bad Debt Expense Formula
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Example: Percentage of Sales Method
Daytona Ltd. uses the percentage of sales method to estimate its bad debt expense. During 2020, the company reported the following:
- Sales revenue: $450,000
- Sales discounts: $23,400
- Sales returns and allowances: $32,000
- Allowance for doubt accounts, Jan. 1: $14,550
- Accounts written-off during 2020: $16,900
- Recoveries of written-off accounts during 2020: $1,000
Historically, 3% of all credit sales have not been collected, prepare the the journal entry to record bad debt expense at the end of the year and determine the ending balance of allowance for doubtful accounts.
Practice: Percentage of Sales
The company uses the percentage of sales method to estimate its allowance for doubtful account, it estimates that 4% of credit sales will never be collected. The following financial information is available:
What is the ending balance of allowance for doubtful accounts?
The unadjusted balance of allowance for doubtful accounts on October 31 was a debit balance of $2,000.