Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Net Accounts Receivable: Percentage of Sales Method

Financial Accounting

7. Receivables and Investments

Net Accounts Receivable: Percentage of Sales Method

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Multiple Choice

Which method for estimating bad debts is based on applying a percentage to each period's net credit sales?

Allowance Method based on Receivables

Direct Write-Off Method

Aging of Accounts Receivable Method

Percentage of Sales Method

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Verified step by step guidance

Understand the concept of bad debts: Bad debts are accounts receivable that are unlikely to be collected. Companies estimate bad debts to comply with the matching principle in accounting, ensuring expenses are recorded in the same period as the related revenues.

Learn about the Percentage of Sales Method: This method estimates bad debts by applying a fixed percentage to the net credit sales of a specific period. The percentage is typically based on historical data and industry standards.

Distinguish the Percentage of Sales Method from other methods: Unlike the Aging of Accounts Receivable Method, which focuses on the age of receivables, or the Allowance Method based on Receivables, which uses a balance sheet approach, the Percentage of Sales Method directly ties bad debt expense to sales activity.

Apply the formula for the Percentage of Sales Method: The estimated bad debt expense is calculated as:

Bad Debt Expense = Net Credit Sales \times Percentage

. Ensure you have the net credit sales figure and the percentage rate determined by historical data.

Record the journal entry: Once the bad debt expense is calculated, record it in the journal as a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. This aligns with the accrual accounting principles.