what was the bad debt method that the company used?? How much was their bad debt expense for the year 2016
Bad debt expense for the year 2016 =$69000
Since the opening balance in allowance for doubtful debts at the beginning of year 2016 was $48000. Closing Balance of allowance of doubtful debts are $112000 ($48000+$69000-$5000 for Net difference in foreign currency exchange )
Recording Bad Debts transaction in the Journal- Journal Entry for Bad Debts are mentioned below
Date of transaction | Particulars | Debit (Dr) | Credit(Cr) |
Bad Debt Expense A/c Dr | 69000 | ||
To Allowance for Doubtful Account | 69000 | ||
Allowance for Doubtful Account Dr | 69000 | ||
To Accounts Receivable | 69000 |
Bad Debt Expense for the year 2016 is calculated using certain percentage of Net Credit Sales. Since the business environment is highly dynamic, uncertain and unpredictable in nature, most organization create provisions/ allowance for bad & doubtful debts because of conservatism principle.
Calculation of Net Credit Sales for year 2016- It is given to us that average credit period on sale is 42 days
Average collection period = 365/ Accounts Receivable Turnover ratio
42=365/Accounts Receivable Turnover Ratio. Therefore Accounts Receivable Turnover ratio =365/42= 8.7 times
Accounts Receivable Turnover ratio = Net value of Credit Sales/ Average Accounts Receivable during the same time period
Hence Net Credit Sales= Accounts Receivable Turnover ratio * Average Receivables during the same period
Net Credit Sales = 8.7 * (836000+ 1025000)/2)
Net Credit Sales= 8.7*930500 i.e. 8095350
Therefore Bad Debt Method used by the company to calculate provision of bad & doubtful debts are certain percentage of Credit Sales during the year. In the Balance sheet Accounts Receivable will be reduced by $112000 due to the provision for doubtful debts created by the company by following conservatism principle.
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