Bad debts expense: Percentage of sales method
Under the income statement approach, called the percentage of sales method, bad debts expense is computed by multiplying the estimated credit loss (uncollectible amounts) percentage by the amount of net credit sales for the year.
First, we must determine the amount of the credit sales for the year:
| Credit sales | = | Net sales – Cash sales |
|---|---|---|
| = | $743,000 – $56,000 | |
| = | $687,000 |
Next, we must determine the amount of the adjusting entry. Multiplying the credit sales by the estimated percentage of credit losses (uncollectible amounts) results in the amount of the adjusting entry:
| Estimated credit loss | = | Credit sales × Estimated percentage of credit losses |
|---|---|---|
| = | $687,000 × 3.5% | |
| = | $24,045 |
Since the balance in the Allowance for Bad Debts account is ignored in the calculation of the amount of the adjusting entry when using the percentage of sales method, we use the estimated credit loss amount for the adjusting entry.
Therefore, the journal entry to record the adjusting entry for credit losses for the year is:
Debit Bad Debts Expense:
Bad Debts Expense, an expense account, is debited (increased) for $24,045.
Credit Allowance for Bad Debts:
Allowance for Bad Debts, a contra-asset account, is credited (increased) for $24,045.
Thus, the answer is:
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