Management can choose between two bases in calculating the estimated uncollectible accounts under the allowance method. One basis emphasizes an income statement viewpoint whereas the other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two approaches. How do the different points of view affect the amount recognized as Bad Debt Expense during the accounting period?

The two bases available to calculate the estimated uncollectibles under the accrual based allowance method are: (a) percentage of sales basis and (b) percentage of receivables basis. The percentage-of-sales basis emphasizes the income statement while the percentage of receivables basis emphasizes the balance sheet. Under the percentage of sales basis the bad debt expense for the period is calculated directly as a percentage of net credit sales without regard to any balance in the allowance account. Under the percentage of receivables basis the emphasis is on establishing the proper amount to carry as a balance in the allowance account; bad debt expense is indirectly determined to be the amount necessary to create the proper balance in the allowance account.