The allowance method of accounting for bad debts requires an estimate of bad debt expense at the end of each accounting period.The two common methods to determine the estimate amount are the percent of sales method and the percent of receivables method.Explain the basic differences between the two methods.

The percent of sales method emphasizes the income statement relationship between Bad Debts Expense and Sales.It is based on the expense recognition principle and assumes that bad debts are incurred and can be estimated at the time of sale.The accounts receivable method emphasizes the realizable value of Accounts Receivable.The accounts receivable method uses either a percent of total accounts receivable or an aging of accounts receivable to estimate the amount of uncollectible accounts.