Question

The balance in Allowance for Doubtful Accounts is important to the calculation of bad debt when bad debt is calculated

A. as a % of credit sales

B. as a % of accounts receivable that will not be collected

C. using direct write-off method

D. None of the above

Please explain. I am confused by the wording of this question.

Answer 1

Answer : B. as a % of accounts receivable that will not be collected

Explanation :

Under  % of accounts receivable that will not be collected , bad debt is calculated as follows :-

Accounts receivale ending balance * Estimated % not be collected	XXX
Less : Cr bal. in Allowance for Doubtful Accounts or. Add : Dr. bal. in Allowance for Doubtful Accounts	XXX
= Bad debt Expense	XXX

Under % of credit sales,

Bad debt expense = Credit sales * Estimated % not be collected

Under direct write-off method , amont of uncollectible is metioned ie in this method no estimation is used & as when bad debt is determined it is dirrectly deducted from accounts receivable .

Conclusion : Thus under % of accounts receivable method balance in Allowance for Doubtful Accounts is important to the calculation of bad debt