Discuss accrual accounting Essay Example | Topics and Well Written Essays - 750 words

Discuss accrual accounting - Essay Example s with uncollectible accounts expense and valuation method is used for reducing the amount of accounts receivable in the balance sheet known as the Net Realizable Value (Needles, Powers & Crosson, 2011). The net credit sales of the current period are multiplied by a certain percentage and this percentage is determined by the company’s past experiences. However, the new companies decide the percentage figure by evaluating the businesses that are present in the same industry. Assuming that a business has net credit sales of $100,000 and the estimated percentage for uncollectibles is about 1%, the bad debts expense will have debit of $1,000. If there is credit allowance for doubtful debts of $150, then the total amount to be recorded is $1,150. In this method, the bad debts expense is calculated by multiplying the total Accounts Receivable amount by a pre-determined percentage. For example, if a company has Accounts Receivable of $100,000 at the end of the accounting period and it is estimated that 5% will not be collected, then the bad debts expense amount will be $5,000 at the end of the period. In the aging method, it is believed that the longer an account’s balance is overdue; there are fewer chances that the debt will be paid and every company maintains the accounts receivable schedule of aging for categorizing the credit purchases of each customer in accordance to the time duration that they have remained outstanding. The total balance of each category is then multiplied by the estimated percentage for that particular category to determine the amount of uncollectible accounts and the total of categories then give the final figure of bad debts expense. Among all the techniques used in the allowance method, the most reliable one is the aging method as it gives a true picture to the business about the amount of Accounts Receivable that will most likely be not collected by the company. This method is the most effective option as it records the expenses on a