Question

Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables? Explain in 150 words

Answer 1

Solution:

Below Two methods commonly are used to estimate the uncollectable amount of account receivables ( bad debts ) most accurately :

1. percentage of sales

2. percentage of account receivables

In the first method,

bad debts are estimated based on a percentage of total sales. This is also called the income approach.

Management decides this percentage based on companies past experience.

For example

Bad debts are estimated 10% of total sales.

Suppose company total sales for the year is $10,000

Then bad debts will be estimated as $1,000 that is 10% of 10,000.

In the second method,

Bad debts are estimated as percentage of total account receivables.

This is also called the balance sheet approach.

The percentage in this case also determined by the management , based on companies past experience.

for example

Bad debts are estimated as 10% of the amount of total account recievable.

Suppose debtor balance in balance sheet is $ 100,000

Amount of bad debts will be 10,000, that is 10% of 100,000.

Finish.