The Barron Company Uses the Percent of Sales Method of Accounting

question 72

Essay

The Barron Company uses the percent of sales method of accounting for uncollectible accounts. Barron Company estimates that 1% of its $2,900,000 of credit sales will be uncollectible. If the balance of the allowance for doubtful accounts was a $4,000 credit before adjustment at the end of the year, prepare the adjusting entry Barron must record.

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Definitions:

Accounts Receivable Turnover

A financial ratio that measures how effectively a company is collecting on its credit sales by dividing net credit sales by average accounts receivable.

Horizontal Analysis

A side-by-side comparison of two or more years’ financial statements.

Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major categories of accounts (or financial statements) is represented as a proportion of the total account.

Common-Size Financial Statement

A financial analysis tool that presents all line items as a percentage of a common base figure, making it easier to compare financial statements of different-sized companies.