How to Calculate Bad Debt Expenses With the Allowance Method
Bad debts arise when a company isn't repaid for credit issued to customers. If a person does not pay the company for goods or services received, the company must write off the account receivable as a bad debt. A company can use the percentage of sales method to calculate bad debt expense based on the percentage of credit sales the company does not expect to collect based on prior year bad debts. The percent of sales method allows the company to compute bad debt expense using the allowance method.
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Instructions
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Verify the estimated percent of uncollectible accounts. Use prior year data to determine the percent of credit sales the company cannot collect. Add last year's total sales. Verify the amount of uncollectible sales from last year. Assume a company has $400,000 total sales and $28,000 were deemed uncollectible. Divide $28,000 by $400,000, which equals .07 or 7 percent. In this instance, the estimated percent of uncollectible accounts is 7 percent.
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Confirm the company’s total sales for the period. View the income statement to determine a company’s total sales for the period. Include cash and credit sales. Assume a company receives $500,000 in cash sales and $200,000 credit sales for the period. Add $500,000 and $200,000 to determine total sales for the period. In this instance, the company has total sales equal to $700,000.
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Multiply the total sales for the period by the estimated percent of uncollectible accounts. This calculation indicates the company’s bad debts expense for the period. Assume a company has 7 percent uncollectible accounts and $700,000 total sales. Multiply .07 by $700,000. In this case, the company’s bad debt expense for the period equals $49,000.
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