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5 June, 10:31

Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net sales. The company uses the percentage-of-sales basis. If the Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment, what is the balance after adjustment

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  1. 5 June, 14:11
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    The balance of the Allowance for Doubtful Accounts after adjustment is $27,000. This represents 1.5% of $800,000 net sales (to be charged to bad debt expense for the month) plus the credit balance of $15,000.

    Explanation:

    An Allowance of Doubtful Accounts is established at the same period when sales take place since an entity is not certain of the amount it will eventually receive from its credit customers. This allowance is an estimate for bad debts.

    Using the percentage-of-sales basis, the company can provide in advance an educated guess of probable bad debts to be incurred using an established rate.
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