Explain how to account for accounts receivable, including bad debts.
- Accounts receivable arise from sales on credit. Companies with many customers may keep detailed records of accounts receivable in a separate subsidiary ledger.
- Because not all customers pay their outstanding bills, an estimate of the accounts receivable less any doubtful accounts must be presented on the balance sheet.
- Bad debts are estimated under the allowance method by one of two approaches:
- Percentage of net credit sales
- Percentage of accounts receivable