Question

describe the allowance method of accounting for uncollectible accounts and the two bases that are generally used to calculate the allowance.

Answer 1

The balance of the accounts receivable in the different aging categories is multiplied by a reserve rate to determine the allowance for uncollectible accounts (see table below). Because older receivables have a lower likelihood of being collected, a greater reserve rate is applied to them.

What two techniques are included in the allowance method for estimating uncollectible accounts?

The two primary approaches for evaluating uncollectible accounts under the allowance method are the percentage of credit sales method and the percentage of receivables method. The percentage of sales approach calculates the estimated proportion of credit sales that are uncollectible accounts will represent for the period.

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