Identify and explain the different methods to accounts receivable and bad debts. What are some internal...
Identify and explain the different methods to accounts receivable and bad debts. What are some internal controls that will help reduce bad debts. Is it possible to eliminate bad debts all together?
Homework Answers
In the question asked above: different methods of accounts receivable as well as different methods for calculating the bad debt
1) the accounts receivable is not taken as an estimate so there are no different methods other than going for accrual basis and hence any amount which is not received from the sales is debited to the accounts receivable account.
2) since the bad debt is taken by way of estimating there are different ways for calculating the percentage or amount of bad debt to be deducted from the accounts receivable
The main ways to calculate the bad debts are:
- Percentage of credit sale; In this scenario, the bad debt is calculated by taking a certain percentage of sales which is already set by the company.
- Percentage of outstanding accounts; in this scenario, the bad debt is calculated by taking a certain percentage of outstanding accounts.
- Allowance method; The accounts receivable balance is partially offset by a contra-asset account called the "allowance for uncollectible accounts" . The amount that will be unpaid will be estimated by the company and when the debt actually goes bad. the company will reduce both the outstanding A/R balance and the allowance by the amount of the uncollectible accounts.
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Identify and explain the different methods to accounts receivable and bad debts. What are some internal...
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