Final answer:
The key transactions/entries under the allowance method include recording an estimated allowance for doubtful accounts and adjusting the allowance based on periodic assessments, affecting the income statement and balance sheet by reflecting anticipated bad debt expenses and reducing accounts receivable.
Step-by-step explanation:
Under the allowance method, companies initially estimate a percentage of sales or analyze past data to determine an allowance for doubtful accounts. This estimated allowance is recorded as a contra-asset on the balance sheet, reducing the accounts receivable to its net realizable value. Periodically, adjustments are made to the allowance based on changes in circumstances or creditworthiness of customers. When adjustments occur, they impact the income statement as bad debt expenses, reducing net income. On the balance sheet, the updated allowance modifies the net accounts receivable, ensuring it reflects a more accurate value. Overall, this method allows for a more accurate representation of accounts receivable by accounting for potential non-payment, aiding in more realistic financial reporting.
In summary, under the allowance method, the key transactions involve estimating and adjusting the allowance for doubtful accounts, impacting financial statements by recognizing bad debt expenses and adjusting accounts receivable.