Which of the following methods does a company use to determine what the balance of the allowance for uncollectible accounts should be?
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A. B. C. D.C
The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.
The correct answer to the question is D. aging.
The allowance for uncollectible accounts, also known as the allowance for doubtful accounts or the provision for bad debts, is a contra-asset account on the balance sheet that represents the estimated amount of accounts receivable that the company does not expect to collect. It is created to anticipate and account for potential losses due to customers who may not pay their outstanding balances.
The company determines the balance of the allowance for uncollectible accounts using various methods, but the most commonly used method is the aging method. The aging method estimates the amount of bad debt based on the aging of accounts receivable.
Here's how the aging method works:
Accounts Receivable Aging: The company categorizes its accounts receivable into different groups based on the length of time the balances have been outstanding. For example, the company may classify the accounts into buckets such as current (0-30 days), 31-60 days, 61-90 days, and over 90 days.
Historical Collection Data: The company analyzes historical data on the collection of accounts receivable from each aging bucket. This data helps identify the percentage of outstanding balances that are typically collected from each category.
Estimated Uncollectible Amount: The company applies the collection percentages from historical data to the current outstanding balances in each aging bucket. This step estimates the portion of accounts receivable that is likely to become uncollectible.
Calculate the Allowance: The estimated uncollectible amounts from each aging bucket are summed up to determine the total allowance for uncollectible accounts. This allowance is then recorded on the balance sheet as a deduction from the total accounts receivable.
Option A, "percent of accounts receivable," is not the correct answer because it does not specify the specific method used to determine the allowance. While the aging method often involves percentages, it is a more detailed and specific approach than just applying a general percentage to the total accounts receivable.
Option B, "neither of these answers are correct," is not the correct answer because the aging method (option D) is indeed one of the methods used to determine the balance of the allowance for uncollectible accounts.
Option C, "both of these answers are correct," is not the correct answer either because only the aging method is used to determine the balance, not both options A and D.
Therefore, the correct answer is D. aging.