We have witnessed many changes in the economy in the past 10 years. Given the changing landscape, what valuation of un-collectible receivables would be best used?
Here is some information for you regarding the valuation of uncollectable accounts:
When it is highly probable that some accounts will prove uncollectible and the dollar amount can be reasonably estimated, estimates of bad debt expense should be made and recorded in the period in which the sale takes place. Two methods of accounting for uncollectible accounts are used in practice-the allowance method and the direct write-off method.
When the seller can make a reasonable estimate of the dollar amount to be written off, the allowance method should be used. The allowance method provides an expense for uncollectible receivables in advance of their write-off. The use of the allowance method serves two purposes. First, it reduces the value of the receivables to the amount of cash expected to be realized in the future. Second, it matches the uncollectible expense of the current period with the related revenues of the period.
The allowance for uncollectible accounts is reported on the balance sheet as a deduction from accounts receivable and is called a contra asset ...