The Allowance Method of Accounting for Bad Debts Requires an Estimate

question 130

Essay

The allowance method of accounting for bad debts requires an estimate of bad debt expense at the end of each accounting period. The two common methods to determine the estimate amount are the percent of sales method and the percent of receivables method. Explain the basic differences between the two methods.

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Definitions:

Spoils

Goods that are damaged or unusable during the production process and cannot be sold to customers.

Monetary Unit Assumption

A financial accounting concept that believes transactions and events can be quantified in terms of money.

Dollar Stability

Refers to the consistency and steadiness in the value of the United States dollar in international and domestic markets.

Medium Of Exchange

An intermediary instrument used to facilitate the sale, purchase, or trade of goods between parties.