Question

Q2- Assume that you have a company. And the management team estimates that 3% of sales will be uncollectible. Give any amount of sales and prepare the journal entry using the percent of sales method.

Answer 1

Bad Debts / Uncollectible Amount   can be estimated on the basis of two methods i.e. one on the basis of percentage of sales and second on the basis of the percentage of account receivable.

For example

If the sales of the year is $ 3,00,000 and 3% of the sales in uncollectible. So the bad debts amount will be

Bad Debts Expense = Sales X Percentage of Sale uncollectible

            = 3,00,000 * 0.03 = 9,000

Following journal entry will be passed

Particulars		Debit	Credit
Bad Debts Expense		9,000
To Allowance for Doubtful Debts			9,000
( 3,00,000 * 0.03)

Effects of the Bad Debts in Financial Statement:

This bad debts expense will be shown as expense in Income Statement and Allowance for Doubtful Debts will be deducted from Accounts Receivable in Balance Sheet under Current Asset.

Analysis:

Company keep percentage of sales as bad debts expense and companies analyse the amount of uncollectible every year and changes the percentage according to the situation. If the company follows strict credit policy then there are less chance of getting bad debts and might keep low level of percentage as uncollectible amount.

If the company gives relax or lenient credit terms then there are chance of having more uncollectible amounts and company needs to keep higher percentage of sales as uncollectible amount .

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