Final answer:
The two ways to estimate the allowance account balance using the allowance method are the percentage of sales method, focusing on revenue, and the accounts receivable aging method, focusing on receivables' collectability.
Step-by-step explanation:
Estimating the Allowance Account Balance
There are two primary ways to estimate the allowance account balance using the allowance method. The first is the percentage of sales method, in which businesses estimate the bad debt expense as a certain percentage of the credit sales made during the period. This method focuses on the income statement and matches the estimated bad debt expense against the sales of the period.
The second method is the accounts receivable aging method. Here, companies estimate the allowance for doubtful accounts by analyzing individual debts and their likelihood of being uncollectible. This approach categorizes receivables based on how long they have been outstanding and applies different percentages of uncollectibility to each category. The focus is more on the balance sheet, where it better reflects the amount of receivables expected to turn into cash. Both methods have their merits and can be used to maintain a reasonable estimation of the allowance for doubtful accounts, keeping the balance sheet accurate.