The income statement approach to estimate bad debts uses the percentage of current year's credit sales.
Why Bad Debt Estimation Matters?
- Bad debt is a type of accounts receivable of an organization that can no longer be collected from a customer because the customer is unable to pay the amount owed by the organization.
- Reporting bad debt increases your overall costs and reduces your net income. Therefore, the amount of bad debt a company reports will ultimately change the amount of tax it pays during a given tax period.
- Bad debts are generally classified as: selling, general and administrative expenses and included in the income statement.
Where do bad debts written off appear on the income statement?
Bad debt write-offs add allowances for bad debt accounts to the balance sheet accounts. This is then deducted from accounts receivable on the current balance sheet. The results are displayed as net receivables.
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