ACC 250 · Ch8 Worksheet

Bad Debts Step by Step: % of Credit Sales Method

Sneaker Supply Co. (a made-up company) expects 2% of each month’s credit sales to be uncollectible and records BDE at the end of each month.

January and February · A/R and ADA start at $0 on January 1

January

What happened in January

Jan 1StartA/R = ADA = $0Jan 5Cash sale$4,000Jan 10Credit sale$6,000Jan 20Credit sale$4,000Jan 31AJE: BDE2% of credit sales
Only credit sales create A/R, so only they carry collection risk. The cash sale is not part of the 2% estimate.

January · Steps 1 and 2

Journal entries and the A/R T-account

Date · AccountDebitCredit
Jan 5  Cash (+A)4,000
Sales Rev (+R)4,000
Jan 10  A/R (+A)6,000
Sales Rev (+R)6,000
Jan 20  A/R (+A)4,000
Sales Rev (+R)4,000
A/R
Jan 106,000
Jan 204,000
End. bal.10,000
Read it from the T-accountJanuary credit sales = 10,000

January · Steps 3 and 4

Month-end adjustment

BDE = 10,000 × 2% = 200

Date · AccountDebitCredit
Jan 31  BDE (+E)200
ADA (+xA, −A)200
ADA
Jan 31 AJE200
End. bal.200
The AJE does not touch A/R. It records the expense and builds up ADA.

January · Step 5

Summary: January 31

Jan 31What it means
Gross A/R10,000Total A/R
Less: ADA200Noncollectible A/R (estimated)
Net A/R9,800Collectible portion of A/R
Net A/RSneaker Supply expects to collect 9,800 of the 10,000 customers owe.

February

What happened in February

Feb 1StartJan 31 balancesFeb 8Cash sale$3,000Feb 15Credit sale$8,000Feb 20Write-off1% of Jan credit salesFeb 28AJE: BDE2% of credit sales
Feb 20: Store A went out of business. 1% of January’s credit sales (10,000 × 1% = 100) is written off.

February · Steps 6 and 7

Journal entries and the A/R T-account

Date · AccountDebitCredit
Feb 8  Cash (+A)3,000
Sales Rev (+R)3,000
Feb 15  A/R (+A)8,000
Sales Rev (+R)8,000
Feb 20  ADA (−xA, +A)100
A/R (−A)100
A/R
Beg. bal.10,000Feb 20100
Feb 158,000
End. bal.17,900
Read it from the T-accountFebruary credit sales = 8,000
The write-off uses up part of ADA. No expense is recorded: it was already recorded as BDE in January.

February · Steps 8 and 9

Month-end adjustment

BDE = 8,000 × 2% = 160

Date · AccountDebitCredit
Feb 28  BDE (+E)160
ADA (+xA, −A)160
ADA
Feb 20100Beg. bal.200
Feb 28 AJE160
End. bal.260
Ending ADA = Beginning ADA + BDE − Write-offs = 200 + 160 − 100 = 260

February · Step 10

Summary: February 28

Feb 28What it means
Gross A/R17,900Total A/R
Less: ADA260Noncollectible A/R (estimated)
Net A/R17,640Collectible portion of A/R
Net A/RSneaker Supply expects to collect 17,640 of the 17,900 customers owe.

Takeaways

What to remember

  1. BDE = this month’s credit sales × 2%. Cash sales are not included.
  2. BDE is an expense for the month. ADA is the balance of A/R expected to go uncollected.
  3. A write-off lowers gross A/R and ADA by the same amount: no expense, and net A/R does not change.
  4. Net A/R = Gross A/R − ADA = the amount expected to be collected.