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Normal Questions
Allowance for doubtful accounts is a contra asset account that reduces accounts receivable. We must enter relevant amount on business balance sheet under asset
We can use different methods for calculate allowance for doubtful accounts
Historical data - We can use percentage of bad debts which had in previous years and determine the bad debt reserve (For example - 5% of sales were uncollectible, say you have $ 50,000 in accounts receivable so your allowance for doubtful accounts would be $50,000x 5% = $2,500).
Aging of accounts receivable - We can group our outstanding accounts receivable by age (For example- say 8% of accounts receivable which are pending between 30 to 60 days are uncollectible and its worth $10,000, allowance for doubtful accounts would be $10,000x 8%= $ 800)
Journal Entry - Bad Debts Expense Debit $ 800, Allowance for doubtful accounts Credit $ 800
1- Percentage of Sales Method The sales method applies a flat percentage to the total amount of sales for the period
2- Accounts Receivable Aging Method Estimating the allowance for doubtful accounts is the aging method. All outstanding accounts receivable are grouped by age, and specific percentages are applied to each group. The aggregate of all group results is the estimated uncollectible amount.
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