Final answer:
To calculate bad debt expense using the percentage of sales method, determine the percentage based on past data or industry average, convert it to a decimal, and multiply it by the total credit sales. For instance, 2% of $50,000 in credit sales would result in a $1,000 bad debt expense.
Step-by-step explanation:
To calculate the bad debt expense using the percentage of sales method, you would apply a fixed percentage to the total credit sales of the period to estimate the amount of uncollectible accounts. This approach is based on the historical percentage of credit sales that result in bad debt.
Here's how you can calculate it:
- First, determine the percentage rate that will be used for the calculation. This rate is often based on past experiences or industry averages.
- Next, find the total credit sales for the period. For example, if the total credit sales are $50,000, you would use this amount for the calculation.
- Then, convert the percentage rate to a decimal. If the bad debt percentage is 2%, you would convert it to 0.02.
- Finally, multiply the total credit sales by the decimal rate to find the bad debt expense. Using our example: $50,000 x 0.02 = $1,000 would be the estimated bad debt expense.
It's important to note that the percentage of sales method focuses only on the sales of the current period and does not consider the existing balance in the allowance for doubtful accounts.