Final answer:
The percentage of receivables is an accounting method used to estimate potential bad debts and accounts for the risk that some customers won't repay their loans or credits. It's a balance sheet approach that impacts a company's financial statements, particularly in the event of an economic downturn or an increase in loan defaults.
Step-by-step explanation:
The student is asking about the percentage of receivables, which is a method used to estimate the portion of accounts receivable that may not be collectible. This is a concept in accounting that is important for businesses to manage their financial risk and ensure accurate financial reporting. When adjusting the balance for bad debt on the balance sheet, a company estimates the expected amount of receivables that will not be paid by customers.
For example, if a bank like Safe and Secure Bank expects a small percentage of loan defaults, it will create a provision for bad debts in its financial expenses to account for this risk. However, if the number of defaults is much higher than expected, such as during a recession, this can cause a significant reduction in the value of the bank's loans on the balance sheet and potentially lead to negative net worth if assets fall below liabilities.