The balance of the accounts receivable in the different aging categories is multiplied by a reserve rate to determine the allowance for uncollectible accounts (see table below). Because older receivables have a lower likelihood of being collected, a greater reserve rate is applied to them.
The two primary approaches for evaluating uncollectible accounts under the allowance method are the percentage of credit sales method and the percentage of receivables method. The percentage of sales approach calculates the estimated proportion of credit sales that are uncollectible accounts will represent for the period.
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