Contrast two different methods of estimating bad debts. Create simple examples.

Expert Solution

There are two methods: Bad debts based on % of sales, based on % of receivable

Bad debts based on % of sale	Bad debts based on % of receivable
Estimation for allowance is based on current period credit sale	Estimatio is based on the existing receivable from past credit sales
The determination of bad debts is the current period addition to the existing provision for bad debts	The determination of bad debts is the total bad debts provision required for the closing receivable. The difference between the existing provision and the closing provision is the current period P&L provision
Formula = sales * estimated %	Formula = Closing receivable * estimated provision %
The method is unrealistic and fails to estimate the difference in the estimate for the prior period receivables as against the original estimate.	The method is realistic and estimates the difference in the estimate for the prior period receivables as against the original estimate.
Any change in the estimate is only prospective and does not change our bad debts evaluation of prior period sale	Any change in the estimate is on the entire receivable and does change our bad debts evaluation of prior period sale
Multiple % estimation is not possible	Multiple % could be applied based on ageing of receivables to estimate bad debts accurately
Eg:	Eg
Sales= 100	Sales 100
Estimate =1%	receivable closing = 200
Then bad debts provision is 1	Estimate 1%
Opening bad debts provision = 1	Opening bad debts provision = 1
Closing bad debt provision = 2	Closing bad debt provision = 200*1%
Receivable closing = 2	Closing bad debt provision =2
Post bad debt provision adjustment receivable is 199	Post bad debt provision adjustment receivable is 200-2 = 198

ekkarill92 answered 2 years ago

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