How do accountants typically estimate the amount of a company's uncollectible accounts expense?

• A. By only writing off accounts when customers declare bankruptcy
• B. By using the cash basis of accounting for all receivables
• C. By applying a percentage to total credit sales based on historical data
• D. By recording all accounts receivable as uncollectible at year-end

Answer: (C)

Verified step by step guidance

1. Understand the concept of uncollectible accounts expense: This is an estimate of the amount of accounts receivable that a company does not expect to collect due to customers' inability to pay.
2. Learn the common methods used to estimate uncollectible accounts: Accountants typically use historical data to apply a percentage to total credit sales or accounts receivable. This is known as the percentage of sales method or the percentage of receivables method.
3. Focus on the percentage of sales method: This method involves analyzing past data to determine the percentage of credit sales that were uncollectible. For example, if historical data shows that 2% of credit sales are uncollectible, this percentage is applied to the current period's credit sales to estimate the expense.
4. Understand why other options are incorrect: Writing off accounts only when customers declare bankruptcy is reactive and does not estimate uncollectible accounts proactively. Using the cash basis of accounting for receivables is not in line with accrual accounting principles. Recording all accounts receivable as uncollectible at year-end is overly conservative and not realistic.
5. Apply the correct method: Accountants use historical data to calculate the percentage of uncollectible accounts and apply it to total credit sales. This ensures the estimate is based on reliable and relevant information.