Question

What method is used to account for uncollectibles of cash (i.e credit cards)?

Answer 1

Credit card companies use the Allowance for Doubtful Accounts method to account for uncollectibles of cash (i.e. credit cards). This method involves analyzing historical data, estimating doubtful accounts, creating an allowance, and recording adjustments.

Step-by-step explanation:

To account for uncollectibles of cash, credit card companies use the Allowance for Doubtful Accounts method. This method helps estimate the amount of credit card receivables that may not be collected.

Here are the steps involved in the Allowance for Doubtful Accounts method:

1. Analyze historical data: The company reviews its past credit card receivables to identify patterns and trends in defaults.
2. Estimate the doubtful accounts: Based on the historical analysis, the company calculates a percentage of credit card receivables that are likely to be uncollectible.
3. Create an allowance: The company establishes an allowance for doubtful accounts on its balance sheet to account for the uncollectible amount.
4. Record adjustments: Periodically, the company adjusts the allowance account to reflect any changes in the estimated uncollectible amount.

By using this method, credit card companies can effectively account for credit card receivables that may not be collected, ensuring more accurate financial reporting.