business has been accounting for its bad A/R using the Allowance Method. For the last 5 years, the business has used the % of net sales estimation method for estimating the adjusting entry at year-end. After the 5 years, the balance of the Allowance for Doubtful Accounts has grown very large in relationship to the total balance in A/R. Provide 2 distinct, possible explanations as to how this could have occurred?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
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