Question

A company wants to use the allowance method to account for bad debts. You are assigned to explain to the company the different methods it can use to estimate bad debts.

Answer 1

By debiting the allowance for doubtful accounts (ADA) and crediting the accounts receivable, the allowance method records the uncollectible and written-off amounts. The ADA is subtracted from the accounts receivable to arrive at the net realizable value (NRV).

What is net realizable value?

A valuation approach called net realizable value (NRV), which is popular in inventory accounting, takes into consideration the total amount of money an asset can bring in from sales less an estimate of the charges, fees, and taxes related to that sale or disposal.

NRV is calculated as expected selling price minus total manufacturing and selling expenses. Use $35 for the value and the projected selling price, for instance, if a business lists things for $50 but anticipates that they will only sell for a discount of $35.

The cash sum that a corporation anticipates receiving is known as net realizable value (NRV). Consequently, net realizable value is also known as cash realizable value. The terms "net realizable value" and "current assets" are frequently used in relation to inventory and accounts receivable.

Inventory should be recorded at the lower of its cost or the amount at which it can be sold, according to the lower of cost or net realizable value principle.

The predicted selling price of an item less the costs associated with its completion, sale, and transportation is its net realizable value.

Learn more about net realizable value, here

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