Final answer:
The aging method is a more accurate but complex way of estimating bad debt expense, involving detailed tracking of accounts receivable based on their age. It's crucial for businesses, especially banks, to make accurate bad debt estimates for financial planning and to account for the risk of loan defaults in their balance sheets.
Step-by-step explanation:
The method for estimating bad debt expense that is more accurate but also more complex is the aging method, also known as the aging of receivables method. This method involves detailed tracking of accounts receivable according to the length of time they have been outstanding. Businesses use this information to estimate the likelihood of accounts turning into bad debts. The percentages of uncollectible accounts typically increase as the receivables age, reflecting the reduced probability of collection over time.
For a business like a bank, estimating the bad debt expense is critical for financial planning. A bank must account for the possibility that a certain percentage of loans will not be repaid. This estimation becomes part of the bank's annual expenses, and the values on its balance sheet reflect this risk. The accuracy of these estimates can be crucial, especially when default rates exceed expectations, as can occur during economic downturns.