GAAP requires receivables be reported on the balance sheet net of uncollectible amounts (bad debt). This means the allowance method must be used to record uncollectible accounts. The allowance method includes making an adjusting entry. In your own words, explain this procedure to a new accounting student. Address these topics:
- the two accounts used in the adjusting entry
- two methods of estimating the bad debt expense amount for the adjusting entry
- how each estimating method could result in a different amount of bad debt expense
- how a different amount of estimated bad debt expense would affect the income statement and the balance sheet numbers
- specific examples/numbers could be used to demonstrate the effect on the financial statements
only one to two paragraphs needed.