Estimating Bad Debts

Estimating Bad Debts - account will have an existing...

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Estimating Bad Debts—Allowance Method Percentage of total accounts receivable method . One way companies derive an estimate for the  value of bad debts under the allowance method is to calculate bad debts as a percentage of the  accounts receivable balance. If a company has $100,000 in accounts receivable at the end of an  accounting period and company records indicate that, on average, 5% of total accounts receivable  become uncollectible, the allowance for bad debts account must be adjusted to have a credit  balance of $5,000 (5% of $100,000).  Unless actual write-offs during the just-completed accounting period perfectly matched the balance  assigned to the allowance for bad debts account at the close of the previous accounting period, the 
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Unformatted text preview: account will have an existing balance. If write-offs were less than expected, the account will have a credit balance, and if write-offs were greater than expected, the account will have a debit balance. Assuming that the allowance for bad debts account has a $200 debit balance when the adjusting entry is made, a $5,200 adjusting entry is necessary to give the account a credit balance of $5,000. If the allowance for bad debts account had a $300 credit balance instead of a $200 debit balance, a $4,700 adjusting entry would be needed to give the account a credit balance of $5,000....
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This note was uploaded on 11/14/2011 for the course ACCT 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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