Problem:
As the accountant for Pure-Air Distributing, you attend a sales managers meeting devoted to a discussion of credit policies. At the meeting, you report that Bad Debts expense is estimated to be $59,000 and Accounts Receivable at year amount to be $1,750,000, less a $43,000 allowance for Doubtful accounts. Sid Omar, a sales manager, expresses confusion over why Bad Debts expense and the allowance for Doubtful accounts are different amounts.
Write a one-page memorandum to him explaining why a difference in Bad Debts expense and the allowance for Debt Doubtful accounts is not unusual. The company estimates bad debt expense as 2% of sales.