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Percent of Sales Method for Estimating Bad Debts Expense

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Percent of Sales Method for Estimating Bad Debts Expense
Percent of Sales Method to Calculate Debt Expense


Bad debts expense is calculated as a straight percentage of the current years
credit sales. The percentage is based on prior years experience, modified for
changes in current year. Any existing balance in the Allowance for Doubtful
Accounts is NOT considered in calculating Bad Debts Expense.

To record bad debt expense use the following equation:

Current Period Sales X Bad Debt %

= Estimated Bad Debts Expense




An Internet Service Provider estimates its bad debts expense to be 2 percent of
credit sales. Their credit sales for 2006 were $1,000,000. During the year 2006, the
Internet Service Provider wrote off $18,000 of uncollectible accounts.

Their Allowance for Doubtful Accounts had a $15,000 balance on January 1,
2006. On its December 31, 2006 balance sheet, what amount should the ISP enter
as a journal entry for Allowance for Doubtful Accounts?

Answer: $17,000
Labels: accounting problems, allowance for doubtful accounts, bad debt, bad debt expense, bad
debts expense, credit sales, percent of sales method