Percent of Net Credit Sales
In the percentage of credit sales, the Net credit sales must first be obtained. This is computed by deducting the cash sales from the total sales to get the gross credit sales. The gross credit sales less the sales returns and discount on credit sales is equal to the net credit sales. The net credit sales is used to determine the bad debt expense. The Bad debt expense is computed by simply multiplying the net credit sales and the percentage of credit sales. The bad debt expense is also used in determining the ending balance of the allowance for doubtful accounts. The allowance for doubtful accounts end is computed by adding the beginning balance of allowance for doubtful accounts, the recovery and the bad debt expense. The sum of these accounts less the write-off will result to the ending balance of allowance for doubtful accounts. The ending balance of allowance for doubtful accounts is deducted from the accounts receivable to be able to determine the net realizable value of account receivables. This method favors the income statement wherein bad debts are based and directly match to the sales recognize in a period.