Percentage of sales in the percentage of sales basis

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Percentage-of-Sales. In the percentage-of-sales basis , management esti- mates what percentage of credit sales will be uncollectible.This percentage is based on past experience and anticipated credit policy. The company applies this percentage to either total credit sales or net credit sales of the current year.To illustrate, assume that Gonzalez Company elects to use the percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2010 are $800,000, the estimated bad debts ex- pense is $8,000 (1% H11003 $800,000).The adjusting entry is: Dec. 31 Bad Debts Expense 8,000 Allowance for Doubtful Accounts 8,000 (To record estimated bad debts for year) After the adjusting entry is posted, assuming the allowance account already has a credit balance of $1,723, the accounts of Gonzalez Company will show the following: 404 Chapter 9 Accounting for Receivables Bad Debts Expense Allowance for Doubtful Accounts Dec. 31 Adj. 8,000 Jan. 1 Bal. 1,723 Dec. 31 Adj. 8,000 Dec. 31 Bal. 9,723 Illustration 9-6 Bad debts accounts after posting Cash Flows no effect A OE L H11005 H11001 H11002 8,000 Exp H11002 8,000 PDF Watermark Remover DEMO : Purchase from to remove the watermark
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Accounts Receivable 405 Total estimated bad debts for Dart Company ($2,228) represent the amount of existing customer claims the company expects will become uncollectible in the fu- ture. This amount represents the required balance in Allowance for Doubtful Accounts at the balance sheet date. The amount of the bad debt adjusting entry is the difference between the required balance and the existing balance in the al- lowance account. If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make an adjusting entry for $1,700 ($2,228 H11002 $528), as shown here. Dec. 31 Bad Debts Expense 1,700 Allowance for Doubtful Accounts 1,700 (To adjust allowance account to total estimated uncollectibles) After the adjusting entry is posted, the accounts of the Dart Company will show: H E L P F U L H I N T The older categories have higher percentages because the longer an account is past due, the less likely it is to be collected. Illustration 9-7 Aging schedule Worksheet.xls File Edit View Insert Format Tools Data Window Help A B C D E F G Number of Days Past Due 1 2 3 4 5 6 7 8 9 10 11 12 13 Customer Total Not Yet Due 1–30 31–60 61–90 Over 90 T. E. Adert R. C. Bortz B. A. Carl O. L. Diker T. O. Ebbet Total Estimated Bad Debts $ 540 Others Estimated Percentage Uncollectible 2% $ 300 500 26,200 $ 2,228 $ 600 450 300 700 600 36,950 $39,600 $ 100 300 1,500 $1,900 $ 200 200 1,600 $2,000 $ 250 300 2,450 $3,000 $ 300 200 5,200 $5,700 $27,000 $ 228 4% $ 300 10% $ 400 20% $ 760 40% Bad Debts Expense Allowance for Doubtful Accounts Dec. 31 Adj. 1,700 Bal. 528 Dec. 31 Adj. 1,700 Bal. 2,228 Illustration 9-8 Bad debts accounts after posting Occasionally the allowance account will have a debit balance prior to adjustment. This occurs when write-offs during the year have exceeded previous provisions for bad debts. In such a case the company adds the debit balance to the required bal- ance when it makes the adjusting entry.Thus, if there had been a $500 debit balance in the allowance account before adjustment, the adjusting entry would have been for $2,728 ($2,228 H11001 $500) to arrive at a credit balance of $2,228. The percentage-
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