2. Estimating Bad Debts Chapter 9 – Part 2

3. COMPARISON OF BASES OF ESTIMATING UNCOLLECTIBLES Percentage of Sales Percentage of Receivables Net Realizable Value Allowance Accountsfor ReceivableDoubtful Accounts Emphasis on Income Statement Relationships Emphasis on Balance Sheet Relationships

4. In the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. Expected bad debt losses are determined by applying the percentage to the sales base of the current period. This basis better matches expenses with revenues. PERCENTAGE OF SALES BASIS

5. Under the percentage of receivables basis, management establishes a percentage relationship between the amount of accounts receivable and the required balance in the allowance account. This percentage can be applied to the total accounts receivable balance, or to individual accounts receivable balances stratified by age. PERCENTAGE OF RECEIVABLES BASIS

6. The required balance in the allowance account is determined by applying the percentage to the accounts receivable balance at the end of the current period. The amount of the adjusting entry to record expected bad debt losses for the current period is the difference between the required balance and the existing balance in the allowance account. This basis produces the better estimate of net realizable value of receivables. PERCENTAGE OF RECEIVABLES BASIS

7. Percentage Sales Basis We estimate that 1% of credit sales will be deemed uncollectible. Sales: $170,000 The estimated bad debt expense will be $1700 (170,000 x 1%) DRCR Dec 1Bad Debt Expense1700 Allowance for Doubtful Accounts$1700

8. Percentage of Receivables Basis We estimate that 4% of receivables will be deemed uncollectible. Receivables: $42500 The estimated bad debt expense will be $1700 (42500 x 4%) DRCR Dec 1Bad Debt Expense1700 Allowance for Doubtful Accounts$1700