Which of the following is an accounting method that (1) estimates and reports bad debts expense from credit sales during the period the sales are recorded, and (2) reports accounts receivable at the estimated amount of cash to be collected?
multiple choice
1. allowance method of accounting for bad debts.
2. direct write-off method of accounting for bad debts.
3. cash basis method of accounting for bad debts.
4. adjustment method for uncollectible debts.
5. aging of notes receivable method.

1. Allowance method of accounting for bad debts.

Explanation:

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of estimated value.

Bad accounts are those credits granted by the company and there is no possibility of being charged.

"When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible."

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.

When reporting the company's net Accounts Receivables it's necessary to deduct the total balance of the Allowance for Uncollectible Account from the gross total balance of the Accounts Receivable.