ACCTG 101 Lecture Notes - Lecture 10: Financial Institution, Promissory Note, Accounts Receivable
Document Summary
Under the parentage of receivables approach, bad debt expense is a function of a company"s receivables balance. Since the allowance method for bad debt relies on estimates, a company"s allowance balance prior to adjustment can have either a debit or credit balance. A debit balance means that the company has experienced greater write- offs during the year than expected. A credit balance indicates that write offs have been less expected. Whether the balance is a debit or credit does not require a company to correct its bad debt expense from the prior year. However, it does affect the adjustment for the current year. The major advantage is that it results in a very meaningful net realisable value. This is because the allowance account is determined as a set percentage of receivables. The disadvantage is that it does not match expenses as well as the percentage of sales approach.