 In this presentation, we will calculate the allowance for doubtful accounts and the bad debt expense using the percentage of revenue method. So first let's consider what we're doing here, why we're doing it, and the two methods that we can use to do so. We're looking at the accounts receivable account and the revenue account, and we can consider the problem with accounts receivable or sales on account, sales on credit in two different ways. We can think of it in terms of the balance sheet problem where we focus in on the accounts receivable or we can focus in on the income statement problem where we focus in on revenue. Now as we focus in on either side, we're going to fix the other side to some degree because when we make a journal entry, it's going to be the same journal entry, meaning or the same accounts, although the dollar amount may differ between the two methods and the estimates used, the two accounts will be a debit to bad debt expense and a credit to the allowance for doubtful accounts. It's just the method we're going to use that will make the difference here. So are we going to focus more on the problem on the income statement or the problem on the balance sheet? What are these two problems? Well, if we look at the balance sheet, then we could say, well, this accounts receivable account showing $1,146,3 is necessary for us to have on the books when we give this information to creditors because they want to know that number. However, it's going to be overstated to the degree that there are some accounts we're not going to get paid with. So we need to figure out how much we're not going to get paid for and make some type of estimate for that. Now to make the estimate, we can't just reduce this accounts receivable account because we don't know who's going to pay us. It's just an estimate. So we know that based on past history, some people aren't going to pay us, but we don't know who. Therefore, we can't go to the subsidiary ledger over here and choose which of these individual, that's down here, which of these individual customers will not pay us. And so that means we can't really reduce the receivable itself. And we wouldn't really want to either because we want to give our reader more information than that. We want to say, hey, this is how much is owed to us. And this is just an estimate. And the difference between these two then is the net receivable we believe we're going to get paid. That's going to be the balance sheet side that we need to do something about that we need to solve for. The income statement side has a problem as well, however. And that's the fact that this revenue account, any revenue account that we made sales on account for credit going through accounts receivable, then our revenue accounts that again, we might not get collection on, meaning we made the sale here on account. If we never get cash, then it's kind of like that sale never happens, not a real sale if we're never going to get paid on the sale. So we should reduce the sales in a perfect world by the amount we're not going to get. We never reduce revenue typically. So we're going to make an expense called bad debt expense. And rather than us waiting to determine that something is uncollectible on the receivable side and then recording the bad debt expense on the income statement at the point in time, it is uncollectible. The direct write-off method, non-journal accepted accounting method typically. We want to estimate, because that wouldn't be good matching, that would be writing off bad debt for sales that happened prior to this. It wouldn't be matching up these sales this month, this year with the bad debt expense. So what we're trying to do here is figure out how much of these sales are going to be uncollectible. If we use the method before we talked about figuring out the allowance for doubtful account, then this side will kind of fall out and it'll be okay, but it's not really focusing on this account. If we focus on this side then, rather than using the accounts receivable focusing on the balance sheet to make the adjustment, we will focus here on revenue. And we'll say, okay, how much of that revenue that we made on account will be uncollectible based on past experience or industry standards. And by focusing on revenue here, we'll still make the same journal entry and do something to the allowance account, but our main focus will be on revenue and it should be, you would think, more accurate than on the revenue side. We should be getting this revenue side more accurate. The two methods in a perfect world would come up to the same number, but they pretty much never will on the two, as they're both going to be estimates focusing on the different side of this journal entry. So under this method, we're focusing more on the revenue side. And what we're going to do is we're just going to say that 3% of the revenue is uncollectible. Now, we could have much more complex methods than that. We could try to determine how much of the receivables were on account clearly. We don't really want to count cash sales and maybe even how much is still out there. But for most book problems in this, from a pretty simplified method and typically the method being more simplified in any case than the receivable method where we typically have an aging process, we're just going to take the percentage of sales. For that reason, for one, the reason that I think most people typically focus on the balance sheet and let the income statement kind of be fixed by the fixing of the balance sheet. And two, because it's a bit more complicated for book problems and therefore they concentrate it on more, you're probably going to see that the accounts receivable method, percentage of receivable method used more often to calculate allowance and that debt. But note that the sales method is usable and it's there. And it's good to know because it emphasizes this other factor, the fact that we have this other matching problem on the income statement. It's not just the balance sheet problem we have. Okay, so if we do this, we're going to take that 378 times 3%. So we'll do that with our formula right here. I'm going to be in D11, D21. And just say this equals 378,000 times 3%, 0.03. And that's it. So I'm just going to take, or if we did that, of course, in the calculator. It's just the 378, that times 3% or 0.03, given us that 11,340. That's going to be the debit to bad debt expense. So I'm going to copy bad debt expense. We're going to put that in C21, right click and paste, 123. We're going to credit something for that same amount. I'm going to do that with our credit plug formula, negative of that number. So I'm just going to put the brackets around it. And that will be going to allowance for doubtful accounts. So we'll copy the allowance for doubtful accounts, right click and copy. We're going to put that here in C22, right click and paste 123. There's our journal entry. Note how much simpler it is here because what we're not doing as we do in the allowance method is concerning ourself with what's already in the allowance account. It doesn't matter because we're focusing on getting this side right, and this side doesn't have what's in the allowance account already in there. Note that the allowance account, what's already in there, represents an error in some ways from prior estimates. So what we're not doing is letting the prior estimates mess up our current estimate for this time period. We're making our current estimate for the matching principle based on just the revenue number, not based on trying to kind of fix the past error from this receivable or allowance, which wasn't exactly right. And it's never going to be exactly right because it's just an estimate. So we don't have to do any kind of subtraction. It is what it is. We'll just base it on revenue. And then whatever happens to the allowance account happens. So we're going to record that. So here's the bad debt expense. It's going to be the second to last account on the trial balance. And therefore, the second to last account on the general ledger. So let's find it. We got the assets, the liabilities, which we have in the equity and the revenue. Here's the bad debt expense. So we're in AA9, AA9, we're going to say equals. We will scroll back over. And we'll scroll back down. And obviously, you can use the bars here, any other method to roll back over. But we want to pick up D21 and enter. So there we have it increasing that to $11,340. That $11,340 then appearing on the trial balance. We're out of balance by the $11,340 until we record the allowance for doubtful accounts, which is what, the third account on the trial balance. And therefore, third account on the general ledger. Here it is, the allowance for doubtful accounts. We want to be on the credit side. I'm in cell T13, T13. This equals, we're going to scroll back over, scroll back down, and pick up that $11,340 and enter. So it's going to go up from that $15,003 by the $11,340. Remember, it's a contra asset account going up in the credit direction, a little bit unusual for an asset account. And that's the $26,640, which we also see on the trial balance. Therefore, the difference between the $1,146,3 and the $26,640 is $1,19,660. We are decreasing, note, the amount of the net receivable here on the balance sheet side, although the focus is down here on the income statement side, where we decreased net income. We had revenue here. We're subtracting out that revenue, matching this actual bad debt to that revenue, even though we don't know who's not going to pay us. We're using an estimate to try to match that up to the same time period in accordance with the accrual matching principle to bring that income down. This is still income revenue, which is credited over the expense of $366,660.