Final Answer:
The two basic ways to estimate uncollectibles are the percentage of sales method and the aging of accounts receivable method.
Step-by-step explanation:
Estimating uncollectibles is crucial for businesses to accurately reflect their financial health. The percentage of sales method involves applying a predetermined percentage to credit sales. This percentage is based on historical data or industry averages, providing a straightforward way to estimate uncollectible accounts. However, it may oversimplify the process and not consider specific customer payment behaviors.
On the other hand, the aging of accounts receivable method takes into account the age of each outstanding receivable. It categorizes receivables into different time buckets, assigning a higher likelihood of non-payment to older balances. This method offers a more nuanced and detailed estimation, reflecting the reality that older receivables are generally riskier. However, it requires accurate aging schedules and assumes that past trends will continue.
Both methods have their strengths and limitations, and companies often use a combination of these approaches for a more comprehensive estimation of uncollectibles. By employing these methods, businesses can make informed decisions about allowances for doubtful accounts, ensuring their financial statements accurately represent the potential losses from uncollectible receivables.