In: Accounting
Explain the percentage of sales and the direct write off methods.
Percentage of sale method:
Percentage of sales method states that the amount of the baddebts expenses to be recognised is caliculated as the percentage of credit sales generated during the period. The balance in the allowances for doubtfull debts will not be considered in caliculating the baddebts in this method.
Example: The company XYZ is estimating that the 4% of the credit sales will be sonsidered as uncollectables( Baddebts) and the creditsales during the period is $300,000
Bad Debt expenses = $12,000 (300,000 * 4%)
Direct written off method:
This direct written of method involves charging the baddebt expenses only when the invoice value is not colleted from the customers. This will not involve change in the sales made earlier only increase in daddebts
Example: The company XYZ made a credit sale of $20,000 to a customer at the time of payment the customer is only able to pay $15,000 so the company will write off $5,000 from the customers account and charge the baddebt expense.