On the income statement, Rankin would match the bad debt expense against sales revenues in the period. It reports the accounts receivable less the allowance among current assets in the balance sheet as follows: Rankin reports Bad Debt Expense on the income statement. To record estimated uncollectible accounts Rankin would make the following adjusting entry at year end: Total net sales for the year were $500,000 receivables at year-end were $100,000 and the Allowance for Doubtful Accounts had a zero balance. To illustrate, assume that Rankin Company’s estimates uncollectible accounts at 1% of total net sales. The formula to determine the amount of the ending estimated bad debts entry is:īad Debt Expense = Net sales (total or credit) x Percentage estimated as uncollectible Since at least one of these conditions is usually met, companies commonly use total net sales rather than credit sales. When cash sales are small or make up a fairly constant percentage of total sales, firms base the calculation on total net sales. In theory, the method is based on a percentage of prior years’ actual uncollectible accounts to prior years’ credit sales. Percentage-of-sales method The percentage-of-sales method estimates uncollectible accounts from the credit sales of a given period. The second method-percentage-of-receivables method-focuses on the balance sheet and the relationship of the allowance for uncollectible accounts to accounts receivable. The first method-percentage-of-sales method-focuses on the income statement and the relationship of uncollectible accounts to sales. Estimating uncollectible accounts Accountants use two basic methods to estimate uncollectible accounts for a period.
0 Comments
Leave a Reply. |