How is Trevor Construction accounting for uncollectible accounts in 2019?
In 2019, Trevor Construction is using the percentage of sales method to account for uncollectible accounts. This method estimates the amount of uncollectible accounts based on a percentage of the company's sales. The estimation is recorded as an expense and serves as a reflection of potential losses from customers who are unable or unwilling to pay their debts. All of Trevor's sales are made on account, which means customers purchase goods or services with the promise to pay at a later date.
Understanding the Percentage of Sales Method for Uncollectible Accounts
The Percentage of Sales Method:
The percentage of sales method is a way to estimate the amount of uncollectible accounts based on the company's total sales. This method assumes that a certain percentage of sales will not be collected due to customers defaulting on their payments. To apply this method, Trevor Construction needs to determine a percentage that represents the expected level of uncollectible accounts. This percentage is usually based on historical data or industry averages.
Calculating the Estimated Uncollectible Amount:
For example, if Trevor Construction determines that historically, 5% of its sales have been uncollectible, the company will multiply this percentage by the total sales for the year to calculate the estimated amount of uncollectible accounts. This estimation will be recorded as an expense in the company's financial statements to reflect the potential losses from uncollectible accounts.
Review and Adjustments:
It's important to note that the percentage of sales method is just an estimation and may not accurately represent the actual amount of uncollectible accounts. Companies should regularly review and adjust their estimation based on the actual collection experience to ensure accuracy in financial reporting.
By using the percentage of sales method, Trevor Construction can proactively estimate and account for potential losses from uncollectible accounts, which contributes to a more accurate financial representation of the company's operations.