Question

EXPLAIN why an aging of receivables is considered to be the most reliable of the methods used to calculate bad debts expense and the resulting allowance for doubtful accounts.

Answer 1

Answer:-

Aging of receivables is considered to be the most reliable of the methods used to calculate bad debts expense and the resulting allowance for doubtful accounts :- The major argument for the use of this method is the more accurate and scientific computation of the Allowance for Bad Debts, and consequently, the accounts receivable are fairly presented in the statement of financial position at net realizable value.  

Aging method helps an organization to Estimate bad debts expense by classifying accounts receivable of a business according to of length of time for which they have been outstanding and then estimating the probability of noncollection for each category. The classification of accounts receivable in the accounts receivable aging schedule also helps the business to identify the customers who take longer to pay so that they can restrict sales to those customers to reduce risk of bad debts.

Example:-

Age Category	Amount	Probability of Noncollection	Uncollectible Amount
1-20 days	$64,200	2%	$1,284
20-40 days	11,900	4%	476
40-60 days	5,200	7%	364
60-80 days	350	12%	42
			$2,166

The aging of accounts receivable involves :-

an analysis of the accounts where they are classified into not due or past due. Past due accounts are further classified in terms of the length of the period they are past due.

The common classifications are:

a. Not due

b. 1 to 30 days past due

c. 31 to 60 days past due

d. 61 to 90 days past due

e. 91 to 120 days past due

f. 121 to 180 days past due

g. 181 to 365 days past due

h. More than 1 year past due

i. Bankrupt or under litigation

The allowance is then determined by multiplying the total of each classification by the rate or percent of loss experienced by the entity for each category.