Using the income statement approach for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a:

Journal Entry for this Transaction

Dr. Uncollectible accounts Expense         $10,000

Cr. Allowance for uncollectible accounts $10,000

Explanation:

Income Statement approach calculate the estimated bad debts based on the percentage of credit sales for the period. Whereas balance sheet method calculates the estimated bad debts on the basis of percentage of closing receivable accounts Balance.

As per given data

Credit sales for the year = $400,000

Account receivable balance at the end of the year = $80,000

According to Income statement Method

Estimated Bad Debt Value = Credit sales for the year x percentage for Estimated un-collectible accounts

Estimated Bad Debt Value = $400,000 x 2.5% = $10,000

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