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As the accountant for Pure-Air Distributing, you attend a sales managers meeting devoted to a discussion of credit policies. At the meeting, you report that Bad Debts expense is estimated to be $59,000 and Accounts Receivable at year amount to be $1,750,000, less a $43,000 allowance for Doubtful accounts. Sid Omar, a sales manager, expresses confusion over why Bad Debts expense and the allowance for Doubtful accounts are different amounts.
Write a one-page memorandum to him explaining why a difference in Bad Debts expense and the allowance for Debt Doubtful accounts is not unusual. The company estimates bad debt expense as 2% of sales.
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In accounting for credit sales and bad debts, we report sales revenue in the period the sales are made, even though some credit sales do not result in collections until the following period. Of course, some credit sales eventually prove to be uncollectible. The fact that some accounts will become uncollectible is what gives rise to bad debts expense and the allowance for doubtful accounts.
DETERMINING BAD DEBTS EXPENSE
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