Question

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?

1) Percentage of credit sales
2) Percentage of accounts receivable
3) Percentage of total sales
4) Percentage of net income

Answer 1

The accepted methods for determining bad debt expense are 1) the percentage of credit sales, based on past uncollectible sales data, and 2) the percentage of accounts receivable, using an aging method that accounts for the time receivables have been outstanding.

Step-by-step explanation:

Among the methods listed for determining the adjustment to bad debt expense, the generally accepted methods are 1) Percentage of credit sales and 2) Percentage of accounts receivable. The accepted methods for determining bad debt expense are 1) the percentage of credit sales, based on past uncollectible sales data, and 2) the percentage of accounts receivable, using an aging method that accounts for the time receivables have been outstanding.

The percentage of credit sales method is based on historical data that shows what percentage of credit sales have been uncollectible in the past, applying this percentage to the current period's credit sales to estimate bad debts.

On the other hand, the percentage of accounts receivable method, also known as the aging method, involves applying differing percentages to accounts receivable balances based on how long they have been outstanding, reflecting the likelihood that older accounts are less likely to be collected.