Allowance- Income Statement and Balance Sheet Approach

Question 1

What are the methods to estimate allowance

Answer 1

1) Income Statement Approach (Percentage of Sales)

2) Balance Sheet Approach (percentage of AR outstanding)

Question 2

What is the difference between the income approach and the balance approach?

Answer 2

Income Statement Approach- Take the percentage of credit sales, do not give consideration to previous balances in the allowance account.

Balance Sheet- Use the aging method and adjust the allowance account to what you think the ending balance should be.