Concept explainers
(a)
Allowance method:
It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method,
Two methods to estimate uncollectible accounts under allowance method are:
- 1. Percentage of sales method, and
- 2. Analysis of receivables method.
Percentage of sales method:
Credit sales are recorded by debiting (increasing)
It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.
Analysis of receivables method:
A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.
Allowance for doubtful account is a contra asset account, whose normal balance is a credit balance.
The amount of the
(b)
Determine the amount of the adjusting entry for doubtful accounts, if estimated doubtful accounts under aging of receivables method is $125,000.
(c)
Determine the amount of the adjusting entry for doubtful accounts, if bad debts are estimated at 1/2 of 1% of sales.
(d)
Determine the amount of the adjusting entry for doubtful accounts, if estimated doubtful accounts under aging of receivables method is $180,000.
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