Blossom company uses the percentage-of-receivables basis to record bad debt expense. This method involves estimating the amount of uncollectible accounts based on the total accounts receivable. Here's how it works:
1. First, Blossom company calculates a percentage, known as the bad debt ratio or allowance ratio. This ratio represents the historical percentage of accounts receivable that have been uncollectible in the past.
2. The company then applies this ratio to the current total accounts receivable to estimate the amount of bad debts. For example, if the bad debt ratio is 5% and the total accounts receivable is $100,000, the estimated bad debt expense would be $5,000 (5% of $100,000).
3. The estimated bad debt expense is recorded as an adjusting entry at the end of the accounting period. This ensures that the financial statements reflect the estimated uncollectible accounts.
4. When actual bad debts occur, Blossom company will write off the specific accounts as uncollectible. This means removing them from the accounts receivable balance and recording them as bad debt expense.
By using the percentage-of-receivables basis, Blossom company can anticipate and account for potential bad debts in a systematic manner. However, it's important to regularly review and update the bad debt ratio to ensure it accurately reflects the company's experience with collecting accounts receivable.