The actual bad debt for a business for the three previous years is 5%, if the net credit sales is 2,000,000 then what is the estimate bad debt expenses for the next year.
To estimate the bad debt expenses for the next year, you need to calculate the estimated bad debt as a percentage of the net credit sales. Given that the actual bad debt for the three previous years is 5%, you can use this information as a basis for the estimate.
To calculate the estimated bad debt expenses for the next year, follow these steps:
Step 1: Calculate the actual bad debt amount for the net credit sales.
Bad Debt Amount = Actual Bad Debt Rate x Net Credit Sales
Given:
Actual Bad Debt Rate = 5% = 0.05
Net Credit Sales = $2,000,000
Bad Debt Amount = 0.05 x $2,000,000
Bad Debt Amount = $100,000
Step 2: Calculate the estimated bad debt expenses for the next year.
Since the actual bad debt for the past three years was 5%, you can assume that this is a reasonable estimate for the next year as well.
Therefore, the estimated bad debt expenses for the next year would also be $100,000.
Note: It's important to keep in mind that bad debt expenses can vary based on various factors, such as changes in the economy, customers' creditworthiness, and the company's credit policies. This estimate assumes that these factors will remain relatively stable in the next year.