A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the allowance method based on

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The allowance method based on aging the trade receivable accounts involves estimating the percentage of uncollectible accounts based on the age of the receivable balances. This method uses the balance sheet to estimate bad debts by creating an allowance account that is a contra asset to the accounts receivable account on the balance sheet. As the aging of the receivables is analyzed, an estimate of the necessary allowance is made and recorded as an adjusting entry at the end of the accounting period. This method is more accurate than the direct write-off method and focuses on the balance sheet rather than the income statement. The other choices (A, C, and D) are based on the income statement and are not as reliable for estimating bad debts.

A Method of Estimating Bad Debts That Focuses on the Balance