Question

In this chapter, we learned several methods for calculating estimated bad debts expense. Of the three methods, % of Sales, % of Accounts Receivable and Aging of Accounts Receivable, which do you think is the most used in practice and why?

Answer 1

Among the three methods specified, the most in practice is the Ageing of Accounts Receivable method. The reason for using this method is as a follows:

Aging analysis is effective tool to classify and identify the receivables outstanding corresponding to their time. It is useful tool for the management to understand to make recoveries and write off that which cannot be recovered. It is done by firstly classifying into different class based in time frame, the amounts outstanding and a percentage of each class as allowance for Bad Debts. The percentage rates of allowance go higher as the time outstanding goes.
On contrast to other methods, this is accurate, clearer and reliable way to provide for allowance for bad debts.