Percent-of-Sales Method
Definition: Method of estimating bad debts by applying a historical percentage to total credit sales for the period. The result is recorded directly as bad deb…
Scope:NarrowDifficulty:Moderate
Method of estimating bad debts by applying a historical percentage to total credit sales for the period. The result is recorded directly as bad debt expense, focusing on income statement accuracy.
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Estimate from credit sales | ||
| $300,000 credit sales × 1.5% = $4,500. | ||
| Bad Debt ExpenseExpense+ | $4,500 | |
| Allowance for Doubtful AccountsContra Asset+ | $4,500 | |
| Income-statement approach; existing allowance balance ignored. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Bad Debt ExpenseBad Debt ExpenseExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$4,500.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$4,500.00
Allowance for Doubtful AccountsAllowance for Doubtful AccountsLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$4,500.00
Normal bal. ▶
$4,500.00
Related Subjects
Related
- Allowance for Doubtful AccountsExpense is added to the allowance regardless of existing balance
- Allowance MethodThis is one specific approach within the allowance method
Contrast
- Percent-of-Receivables MethodReceivables method is balance-sheet; sales method is income-statement
- Aging-of-Receivables MethodAging is a balance-sheet approach using multiple rates
Produces
- Bad Debt ExpenseDirectly computes the expense amount from credit sales
External Links
- Bad debt#Allowance method — Wikipedia