Which of the following best describes the purpose of the aging of receivables method in estimating net accounts receivable?

• A. It compares an individual's monthly earnings to their total debts.
• B. It categorizes accounts receivable based on how long they have been outstanding to estimate uncollectible amounts.
• C. It calculates the interest earned on outstanding receivables.
• D. It records all receivables at their original invoice amounts without adjustments.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the aging of receivables method: This method is used to categorize accounts receivable based on the length of time they have been outstanding. It helps estimate the portion of receivables that may be uncollectible.
2. Recognize the purpose of the method: The primary goal is to assess the likelihood of collection and adjust the accounts receivable balance accordingly to reflect its net realizable value.
3. Identify the process: Accounts receivable are grouped into categories (e.g., 0-30 days, 31-60 days, 61-90 days, etc.) based on the age of the receivable. Older receivables are generally considered more likely to be uncollectible.
4. Estimate uncollectible amounts: For each category, a percentage is applied based on historical data or industry standards to estimate the uncollectible portion. This helps in determining the allowance for doubtful accounts.
5. Adjust the accounts receivable balance: The estimated uncollectible amounts are used to adjust the accounts receivable balance, ensuring that the financial statements reflect the net realizable value of receivables.