Question

During its first year of operations, Bay Area Auto Parts sold merchandise to customers for $320,000. Based on industry standards, the company decided to create allowance for doubtful accounts for 1% of sales revenue. The company collected $295,000 from customers who purchased inventory on account. During the year, the company wrote off $1,400 as uncollectible accounts. What is the balance of "Allowance for Doubtful Accounts" at the end of the year?

Answer 1

Answer:

Compute the Allowance for Doubtful Accounts as of year end by adding the Uncollectible Accounts Expense (which is 1% of sales on account) and Uncollectible Accounts Charged off during the Year since those accounts are deemed uncollectible and are deducted from Accounts Receivable and removed from the allowance account.

Allowance for Doubtful Accounts = [Sales on Account × 1%] - Write-offs

Allowance for Doubtful Accounts = [$320, 000 × 0.01] - $1,400

Allowance for Doubtful Accounts = $1,800

The Allowance for Doubtful Accounts balance as of year end is $1,800.