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:

Records Keeping

The practice of maintaining and organizing records and documents, often for compliance and operational purposes.

Cash Drawer

A container or compartment within a cash register where cash from transactions is kept, often used in retail settings.

Internal Control

Processes and procedures implemented by a firm to safeguard assets, enhance the reliability of financial reports, and ensure compliance with laws and regulations.

NSF

An acronym standing for "Non-Sufficient Funds," indicating that a check cannot be honored due to inadequate funds in the payer's account.