Percentage of Sales Method
A method of estimating bad debt expense by applying a historical percentage to total credit sales each period.
What is Percentage of Sales Method?
The percentage of sales method (also called the income statement approach) estimates uncollectible accounts by multiplying credit sales for the period by a rate derived from historical bad debt experience — for example, 1% of credit sales. The resulting amount is recognized as bad debt expense and added to the allowance for doubtful accounts. This approach focuses on the income statement: it ensures bad debt expense is matched to the revenue that generated the receivables, consistent with the matching principle. Unlike the balance sheet approach (aging of receivables), it does not directly target a specific allowance balance. Most companies combine both methods for complete analysis.
Example
A retailer historically writes off approximately 1.5% of credit sales as uncollectible. In Q3 2024, credit sales total $2,000,000. Using the percentage of sales method, bad debt expense for the quarter is estimated at $30,000 (1.5% × $2,000,000), which is debited to bad debt expense and credited to allowance for doubtful accounts.
Source: FASB ASC 310 — Receivables