Question: 1. The advantages of extending credit are that it allows a company to compete effectively with competitors who extend credit. The additional gross profit earned from selling on account is greater than the additional costs incurred.
The disadvantages of selling on credit include increased wage costs incurred in hiring personnel to monitor and track credit customers, bad debt costs from accounts that are collected late or not at all, and delayed receipt of cash.
2. Percentage of credit Sales Method and Aging of Receivables Method
3. With the aging of accounts receivables method, the calculated amount is the desired balance to which the Allowance for Doubtful Accounts is to be adjusted. That is, the difference between this calculated amount and the existing balance in the Allowance for Doubtful Accounts is the amount recorded as an adjustment to Bad Debt Expense and the Allowance for Doubtful Accounts. In contrast, with the percentage of credit sales method, the calculated amount is the amount recorded as an adjustment to Bad Debt Expense and the Allowance for Doubtful Accounts.
4. The write-off of uncollectible accounts using the allowance method decreases the asset Accounts Receivable and decreases the contra-asset Allowance for Doubtful Accounts by the same amount. As a consequence, (a) net income is unaffected and (b) net accounts receivable is unaffected.