Q18RQ - Horngren'S Financial And Managerial Accounting

Question

What is the difference between the percent-of-receivables and aging-of-receivables methods?

Step-by-Step Solution

Answer

Percent-of-receivables method computes bad debts expense as a percentage of Ending balance of accounts receivable. Whereas, aging-of-receivables method computes bad debts expense byapplying a different percentage for each aging category of accounts receivable

Step 1: Explanation on bad debts expense

The amount which cannot be collected from the credit customers, which is bad debts expense. 

Step 2: Difference between percent-of- receivables and aging-of- receivables

SNO	Percent-of-receivable	Ageing-of-receivable
1	Bad debts is calculated on ending balance of accounts receivablemultipliedwith estimated percentage.	Bad debts is calculated by applying different percentage for each aging category of accounts receivable.
2	Single bad debtspercentage is used to estimate bad debts expense.	Each category wise percentage has to assigned.