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If you use the allowance method to record bad debts expense, you need to select a...

If you use the allowance method to record bad debts expense, you need to select a method for estimating the amount of the adjusting entry. Assume you use the estimate based on percent of sales. Explain how you would calculate the amount of the adjusting entry
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Answer #1

When using the allownace method to record bad debts expense then the entry is

Dr. Bad debt (debiting bad debts increases the bad debts account)

Cr. Allownance for doubtfull accounts.( Increase the reserve)

Calculation of Bad debt using percentage of sales = Total sales * % of bad debt

The % of bad debt is fixed by the company. Total sales or total sales is available in the Statement of Profit or Loss Account.

For example the sales for the year is $ 1,000,000 and the allownace for bad debt is 2%.

Bad debt = $1,000,000 * 2% = $20,000

Here $ 20000 is the bad debt for the period.

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