Final answer:
To estimate uncollectible A/R using the percentage of credit sales method, multiply the total credit sales by a historical uncollectible percentage, and then record the result as bad debt expense.
Step-by-step explanation:
Estimating uncollectible accounts receivable (A/R) using the percentage of credit sales method is a common technique in accounting for assessing the potential for credit losses. This method involves applying a predetermined percentage, which represents historical losses, to the total amount of credit sales during a period to estimate the uncollectible portion of A/R. The steps to carry out this estimation are as follows:
- Identify the total amount of credit sales for the period.
- Determine the historical percentage of credit sales that typically become uncollectible.
- Multiply the total credit sales by the uncollectible percentage to estimate the bad debt expense.
- Record the estimated bad debt expense in the income statement and adjust the allowance for doubtful accounts on the balance sheet accordingly.
For example, if a company has $100,000 in credit sales and its historical data shows that 2% of credit sales are uncollectible, the bad debt expense for the period would be $2,000 ($100,000 x 0.02), which would then be recorded as an expense and used to adjust the allowance for doubtful accounts on the balance sheet.