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.

---

Definitions:

Selling and Administrative Expenses

Costs not directly linked to the production of goods, including marketing, salaries of administrative staff, and other general expenses.

Split-off Point

The stage in a production process where joint products can be recognized as individual products.

Joint Processing Costs

Costs that are incurred up to the split-off point in a process that produces multiple products from a common input.

Financial Advantage

The benefit attained from making certain business decisions or investments, often measured in terms of improved profitability or cost savings.