Discuss the advantages and disadvantages of the methods to estimate Research Paper

Discuss the advantages and disadvantages of the methods to estimate uncollectible receivables - Research Paper Example However, the disadvantage of such method is that it does not consider customers and their past trend for paying off their debts. It may be possible that in previous years, 20% of the receivable would have been uncollectible because customers were not trustworthy. However, this assumption may not be correct for the current year customers. In such a case, the percentage should also be revised accordingly. Another demerit of this method is that it applies to all of the company’s sales, which may include cash transactions also. It must be noted that uncollectible amounts are only against receivables (Barry, Ralph and Steven). It requires time to calculate uncollectible receivables by this method as bifurcation between cash and credit sales is difficult especially when the volume of transaction is high (Barry, Ralph and Steven). In this method, the collectibles are first analyzed as per their period. Such receivables may be classified as 15 days past due, 30 days past due, etc. Estimates are then made for debts beyond one year or other such criteria (Belverd and Marian). This aging helps to ascertain the will and financial health of the customer for paying off the debt. Another advantage of such aging method is that it helps to prioritize the efforts of recovery for individual debts based on the due days. More aged items are given more priority for recovery (Belverd and Marian). Disadvantage of such method is that it estimates those receivables to be uncollectible which may be received after certain time. It may be possible that the customer was willing to pay the amount, but he was unable to do that due to any reason such as liquidity crisis. Subsequently, customer may pay that amount which was expensed out as bad debt (Belverd and Marian). In this method, different classes of aging are applied different percentages for estimating the bad debts. For example, by applying 10%, 20% and 50% to 6 months, 9 months and 12 months old