 There are three common ways to estimate the amount of bad debt expense to be recorded under the allowance method. They are the percent of sales method, the percent of receivables method, and the aging of accounts receivables method. We will learn about the percent of sales method in this short video. The percent of sales method is sometimes called the income statement approach to estimating bad debt expense because it focuses on the income statement account, bad debt expense. The calculation is pretty straightforward. It is revenue times some historical bad debt rate, and this equals our bad debt expense. The amount we calculate is the amount used in the adjusting journal entry to record bad debt expense. In this example, assume new order estimates that 2% of sales will become uncollectible. They had sales of $100,000 and the allowance for doubtful accounts had a credit balance of $500. So we multiply $100,000 of revenue by the historical bad debt rate of 2% to get $2,000 of bad debt expense. The balance in the allowance account does not impact the amount for this method. So we debit bad debt expense and credit the allowance for doubtful accounts for $2,000. The balance in the allowance for doubtful accounts is now an adjusted balance of $2,500.