Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

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Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

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Step 1

Allowance method

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debts account.

Two methods to estimate uncollectible accounts under allowance method are:

1. Percentage of sales method, and
2. Analysis of receivables method.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

Analysis of receivables method:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.

Step 2

Identify the method which provides the most accurate estimate of the net realizable value of the receivables:

Analysis of receivables m...

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