When bad debts are estimated, why is the balance in Allowance for Doubtful Accounts considered when the percentage of accounts receivable approach is used but not when the percentage of net credit sales approach is used?
Solution
The allowance for doubtful accounts is being considered for estimating the bad debts under the percentage of receivable account approach as all the receivables transactions are added to receivable account balances . Always the firm treats the portion of receivable accounts as baddebts hence while estimating the bad debts under percentage of receivables method we would consider the allowance for doubtful accounts. But however in percentage of net credit sales a portion of credit sales were considered as uncollectible and they would be used for estimating the bad debts.
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When bad debts are estimated- why is the balance in Allowance for Doub.docx
1. When bad debts are estimated, why is the balance in Allowance for Doubtful Accounts
considered when the percentage of accounts receivable approach is used but not when the
percentage of net credit sales approach is used?
Solution
The allowance for doubtful accounts is being considered for estimating the bad debts under the
percentage of receivable account approach as all the receivables transactions are added to
receivable account balances . Always the firm treats the portion of receivable accounts as
baddebts hence while estimating the bad debts under percentage of receivables method we would
consider the allowance for doubtful accounts. But however in percentage of net credit sales a
portion of credit sales were considered as uncollectible and they would be used for estimating the
bad debts.
