Final answer:
The balance of allowance for uncollectible accounts at the end of 2025 can be calculated using the aging of accounts receivable method or the percentage of sales method. The aging of accounts receivable method involves categorizing accounts receivable based on the length of time they have been outstanding and applying different estimated uncollectible percentages to each category. The percentage of sales method calculates the allowance for uncollectible accounts based on a percentage of credit sales made during the year.
Step-by-step explanation:
The balance of allowance for uncollectible accounts at the end of 2025 can be calculated using the aging of accounts receivable method or the percentage of sales method. The aging of accounts receivable method involves categorizing accounts receivable based on the length of time they have been outstanding and applying different estimated uncollectible percentages to each category. The percentage of sales method calculates the allowance for uncollectible accounts based on a percentage of credit sales made during the year.
For example, if a company estimates that 2% of accounts receivable that are less than 30 days old will not be collected, 5% of accounts receivable that are 31-60 days old will not be collected, and 10% of accounts receivable that are over 60 days old will not be collected, you would calculate the allowance for uncollectible accounts as follows:
- Calculate the balance of accounts receivable in each category (less than 30 days, 31-60 days, and over 60 days) at the end of 2025.
- Multiply the balance of accounts receivable in each category by the estimated uncollectible percentage.
- Sum up the results to get the total balance of the allowance for uncollectible accounts at the end of 2025.