Question

When comparing the direct write-off and allowance methods, which of the following statements applies to the allowance method? a.Primary users are small companies and those with a small amount of receivables. b.The expense is recognized when the account is written off rather than in the period of sale. c.The result is based on either a percentage of sales or an analysis of receivables. d.No allowance account is used.

Answer 1

Answer:

c.The result is based on either a percentage of sales or an analysis of receivables

Explanation:

Generally, companies will choose between two approaches under the allowance method.

Percentage of Sales:  Using historical data, a company examines the relationship between sales and uncollectible accounts receivable.  If there is a fairly stable relationship between the two, a company will use the historical Uncollectible Accounts / Credit Sales ratio to estimate the bad debts expense in the current period.

This method is sometimes referred to as the income statement approach.

Percentage of Accounts Receivable:  Using historical data, a company examines the relationship between accounts receivable and uncollectible accounts.  Companies will oftentimes increase the accuracy of these estimates by looking at their aging schedule for patterns, rather than using a composite (or total) of their receivables

This method is sometimes referred to as the balance sheet approach