How to Use the Percent of Sales Method for Bad Debts

Under the Percent of Sales Method for tracking bad debts, credit sales (not cash sales) are multiplied by a percent to arrive at the estimate for bad debts. That percentage will be based on the company’s past experience with uncollectible accounts.

For example, if total credit sales for the month are $100,000 and it is estimated that 1% of a percent of those sales will be uncollectible, the Allowance for Doubtful Accounts amount for that month would be $100,000 x .01 = 1,000.

This calculation is done each month based on the current month’s credit sales and the total accumulates in the Allowance account. This is different from the Aging of Accounts Receivable Method where a journal entry is done to bring the balance in the account to the desired balance.

Under Percent of Sales method, we increase the account by the percent of sales each month for that month’s credit sales. The account is reduced (debited) when specific bad debts are identified and written off.

What is the Journal Entry for Percent of Sales Method for Bad Debts

In the example above, the credit sales of $100,000 was multiplied by the estimated percent of 1% for a $1,000 estimated bad debt expense for the current month. The adjusting journal entry to record that amount is:

Bad Debts Expense	1,000
Allowance for Doubtful Accounts		1,000

How to Write-off Bad Debts Using the Percent of Sales Allowance Method

When a specific account is determined to be uncollectible, a company will write-off the amount using a journal entry:

Allowance for Doubtful Accounts	500
Accounts Receivable–XYZ Co.		500

If the balance in Allowance for Doubtful Accounts from the previous month was zero, the new balance would be reflected on the balance sheet here:

Accounts Receivable	$438,200
Less Allowance for Doubtful Accounts	(1,000)
Net Realizable Value	$437,200

If the balance in Allowance for Doubtful Accounts from the previous month had an existing credit balance of $4,000, the new amount would be added to the previous balance reflected on the balance sheet here:

Accounts Receivable	$438,200
Less Allowance for Doubtful Accounts	(5,000)
Net Realizable Value	$433,200

If the balance in Allowance for Doubtful Accounts from the previous month had an existing debit balance of $100, the new amount would be added to the previous balance (100 debit + 500 credit = credit balance of 400) reflected on the balance sheet here:

Accounts Receivable	$438,200
Less Allowance for Doubtful Accounts	(400)
Net Realizable Value	$437,800

For the complete Accounting Student Guide to Bad Debts and the Allowance for Doubtful Accounts, check out this article:

Allowance for Doubtful Accounts | Accounting Student Guide