Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 550

Financial Statements

Chapter 18

Student Guide

Let’s say that the ABC Company reviewed the sales for a particular period and determined, based on past

experience, that one percent of those sales is uncollectible. Also assume that at the end of that period,

December 31, 20YY, the total revenues were $125,000. So, $1,250 (one percent of $125,000) should be

recorded as bad debt expense as follows:

12/31/20YY Debit Credit

Bad Debt Expense $1,250

Allowance for Doubtful Accounts $1,250

To increase the Bad Debt Expense and the Allowance for Uncollectible Accounts at 1% of the sales

for the accounting period ending 12/31/20YY.

Estimating the bad debt expense as a percentage of sales is consistent with the matching principle concept

of US GAAP—the bad debt is recorded in the same time period as the associated revenue. You should

record the bad debt expenses under the operating expenses on the income statement.

ABC Company

Income Statement (Partial Statement)

December 31, 20XX

Operating Expenses

Sales Salaries 22,000

Advertising Expenses 2,500

Bad Debt Expense 1,250

Supplies Expenses 1,500

Total Selling Expenses 27,250

Office Salaries 15,000

Insurance Expenses 995

Office Supplies 1,500

Depreciation Expense, Office Equipment 2,200

Total General and Administrative Expenses 19,695

Total Operating Expenses $46,945

The Income Statement Lesson 18.1 (cont’d)