When using the allowance-credit sales method, how is the estimated bad debt expense calculated?

The estimated bad debt expense under the allowance-credit sales method is calculated by taking total sales and multiplying it by the estimated percentage of bad debts. This approach aligns with the accrual accounting principle, which emphasizes matching revenues with their related expenses in the same accounting period.

This method enables companies to anticipate future credit losses based on past experience and current sales levels. By applying a specific percentage to total credit sales, businesses can establish an allowance for doubtful accounts that reflects expected losses from uncollectible accounts receivable. This forecasting is crucial for financial planning and ensures that the financial statements accurately represent potential credit risk.

Other options do not align with the allowance-credit sales method's principles. For instance, calculating total asset values focuses on the overall balance sheet rather than specific sales activities. Averaging historical bad debts with current sales lacks the direct link between current sales figures and estimated losses, which is vital in this context. Similarly, subtracting current collections from credit sales does not determine bad debt expenses but provides a different perspective on cash flow and collection efficiency.