Accounting...Question????

Question

Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

Answer 1

The allowance for doubtful debts is usually made based on a review of the aged listing of accounts receivable. Situations that may require the establishment of an allowance:
a. A receivable will not be totally collected
b. A debtor has filed for bankruptcy
c. An estimate should be based upon the aged receivables over 180 days delinquent and the receivable is deemed uncollectible
The above assumes that someone actually looks into individual debtor balances. If there are too many debtors to allow this method of making allowances, some companies use the following method, but it is still based on the aged listing of AR. For e.g. a company could arrive at the amt for the allowance by applying the following percentages to the open invoices:

Current - 2%
1-30 Days Past Due - 5%
31-91 Days Past Due - 20%
91-180 Days Past Due - 40%
181-360 Days Past Due - 60%
Over 360 Days Past Due - 90%

The allowance represents the dollar amount of open invoices that is estimated to be uncollectible.