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Two methods for bad debts are explained; credit card expense

Please explain the difference in determining the bad debt expense when using "accounts receivable" as the basis and using "credit sales" as the basis. Include the way it is recorded in the allowance account.

Please also explain this briefly:

8. Credit card expense may be classified as:

A) A "discount" deducted from sales to get net sales.
B) A selling expense.
C) An administrative expense.
D) All of the above.
E) Only a and b.

What is actually meant by credit card expense.

Solution Preview

There are two methods for estimating the amount of sales that will become bad debts. There is the percentage of sales method and the percentage of receivable method, as you noted. Both involve making a calculation for the amount expected to go bad. Both methods are commonly used in the real world even though the percentage may vary from industry to industry, and from company to company. There are other factors that will affect the amount of bad debts including credit policies, amount of cash sales and type of product, to name a ...

Solution Summary

In a 370-word solution, the response explains the difference between the two methods of recording an allowance for bad debts. Sample journal entries are presented for both methods. The question of the credit card expense is explained both in theory and practical application in the real world.

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