Which of the following statements concerning the estimation of bad debt expense

Question

Which of the following statements concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct? It causes an adjustment to the allowance account based on the balance in that account immediately prior to the adjustment. It is based on the net realizable value of the accounts receivable. It produces the same results as an aging of accounts receivable. It emphasizes the matching of revenues and expenses on the income statement. Which of the following statements concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct? It causes an adjustment to the allowance account based on the balance in that account immediately prior to the adjustment. It is based on the net realizable value of the accounts receivable. It produces the same results as an aging of accounts receivable. It emphasizes the matching of revenues and expenses on the income statement. Which of the following statements concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct? It causes an adjustment to the allowance account based on the balance in that account immediately prior to the adjustment. It is based on the net realizable value of the accounts receivable. It produces the same results as an aging of accounts receivable. It emphasizes the matching of revenues and expenses on the income statement.

Explanation / Answer

The following syatement concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct-
It causes an adjustment to the allowance account based on the balance in that account immediately prior to the adjustment.

Percentage of Sales Method

The percentage of sales method is based on the premise that the amount of bad debt is based on some measure of sales, either total sales or credit sales. Based on prior years, a company can reasonably estimate what percentage of the sales measure will not be collected. If a company takes a percentage of sales (revenue), the calculated amount is the amount of the related bad debt expense.

Therefore answer is option (a)

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