Question

Ervin Company uses the allowance method to account for uncollectible accounts receivable. What is the allowance method used for?

1) Recording sales revenue
2) Calculating net income
3) Estimating and reporting bad debts
4) Determining the cost of goods sold

Answer 1

The allowance method is used for estimating and reporting bad debts in accounting for uncollectible accounts receivable.

Step-by-step explanation:

The allowance method is used for estimating and reporting bad debts in accounting for uncollectible accounts receivable. Under this method, a contra-asset account called the Allowance for Doubtful Accounts is created to estimate the amount of accounts receivable that are expected to be uncollectible.

When a company records a sale, it also records a corresponding increase in accounts receivable. However, not all customers may be able to pay their balances in full. The allowance for doubtful accounts is used to offset the accounts receivable balance, reflecting the estimated portion that will not be collected.

This method helps companies to properly report their financial statements by matching the estimated bad debts against the sales revenue, thus providing a more accurate representation of the company's financial position.