When receivables are material,companies must employ the allowance method to account for uncollectibles.

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The allowance method is required when the company determines that its accounts receivable balance is material, meaning it is significant enough in relationship to the total assets or revenues of the company that its balance must be reported accurately on the financial statements. The allowance method involves estimating and recording the amount of uncollectible accounts as a contra asset account, which reduces the reported amount of accounts receivable on the balance sheet to the amount expected to be collected. This method is required by the generally accepted accounting principles (GAAP) and is necessary for accurate and transparent financial reporting.

When Receivables Are Material,companies Must Employ the Allowance Method to Account