Under the percentage of sales method for estimating bad debts, which of the following best describes how net accounts receivable is determined at the end of the period?

• A. Net accounts receivable equals accounts receivable plus the estimated bad debt expense.
• B. Net accounts receivable equals accounts receivable minus the allowance for doubtful accounts calculated as a percentage of ending accounts receivable.
• C. Net accounts receivable equals accounts receivable minus the actual write-offs during the period.
• D. Net accounts receivable equals accounts receivable minus the estimated bad debt expense based on a percentage of sales.

Answer: (D)

Verified step by step guidance

1. Understand the concept of net accounts receivable: Net accounts receivable represents the amount of accounts receivable that a company expects to collect after accounting for potential bad debts.
2. Review the percentage of sales method: This method estimates bad debt expense as a percentage of total sales during the period. The estimated bad debt expense is recorded as an adjustment to the allowance for doubtful accounts.
3. Determine the relationship between accounts receivable and bad debt expense: Net accounts receivable is calculated by subtracting the estimated bad debt expense (based on the percentage of sales) from the total accounts receivable balance.
4. Clarify why other options are incorrect: For example, net accounts receivable is not calculated by adding bad debt expense to accounts receivable, nor is it determined by subtracting actual write-offs during the period. These methods do not align with the percentage of sales approach.
5. Conclude with the correct calculation: Net accounts receivable equals accounts receivable minus the estimated bad debt expense, which is derived from applying the percentage of sales method.