Question

how does the recognition of (estimated and actual) sales returns for cash and credit sales affect the income statement/ Balance sheet by using the percentage sales method?

Answer 1

Answer:

Under percentage-of-sales method Bad debt expense is debited and allowance for bad and doubtful debts is credited with a percentage of the current year’s credit or total sales.

As per revenue recognition, estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded.

Affect on income statement/ Balance sheet

Income Statement – Bad Debt Expense is included in Selling Expense, which is generally combined with General and Administrative Expense.

Balance Sheet – Accounts Receivable may be shown as a net amount, a net amount with details of allowances, or as a gross amount followed by an allowance account.