Question

Which of the following statements is true regarding the two allowance methods used to account for bad debts?

a.The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account.

b.The direct write-off method does a better job of matching revenues and expenses.

c.The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account.

d.The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.

Answer 1

Answer.

Option D is correct.

The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.

Accountants use two basic methods to estimate uncollectible accounts for a period. The first method—percentage-of-sales method—focuses on the income statement and the relationship of uncollectible accounts to sales. The second method—percentage-of-receivables method—focuses on the balance sheet and the relationship of the allowance for uncollectible accounts to accounts receivable.