Question

What is the conceptual difference between the (1) percentage of creditsales and (2) aging methods of estimating bad debts? What kind of account isallowance for doubtful accounts? What does it represent?

Answer 1

• Answer 1

The conceptual differences between ‘Percentage of credit sale’ method and ‘aging’ method are:
>Bad Debt expense is calculated on the amount of total credit sales for the period under percentage of credit sale method. While under Aging method, Bad Debt expense is calculated by adjusting the balance of Allowance for Uncollectible account to the estimated percentage of uncollectible based on ending Account Balance receivables.

>Bad Debt expense recorded under Percentage of credit sale ONLY belong to the THAT period for which that Credit Sale belongs to. However, under Aging Method, the accounts receivables balance may be containing certain balances that belonged to the sale of previous year(s).

• Answer 2

--Allowance for Doubtful Account is a CONTRA ASSET account.

As you know, Asset accounts have debit balances, A Contra Asset account has a credit balance. They are increased if credited and decreased if debited. It is due to the fact that this account is a Contra Asset account that is deducted from Accounts Receivables balance when being presented in the Balance Sheet on Asset side. Contra Asset accounts decrease the Asset balances.

• Answer 3

Allowance for Doubtful Account represents the amount that has been estimated to be uncollectible. Accounts receivable accounts are the account from which the company expects to receive the amount that is due. However, there are instances when the customer/client doesn’t pay or it looks like that he wont be paying. In those cases, the company estimates an amount that will be not be collected and make a provision for the same. This is done through Allowance for Doubtful Account. Hence, these represents the amount that is expected to be not received. That is why these are deducted from accounts recievables balance on Balance Sheet so that “Net Receivable” amount can be ascertained.