Under the aging method, why are estimates used for bad debt rather than exact amounts?

• A. Because all receivables are always collectible
• B. Because it is easier to compute than actual write-offs
• C. Because some receivables may become uncollectible
• D. Because it is required by cash basis accounting

Answer: (C)

The main idea is that not every receivable will be collected, so we use an estimate to reflect that risk. The aging method analyzes accounts receivable by how long they’ve been outstanding and applies historical loss rates to each age category. This creates an allowance for doubtful accounts, which reduces the reported accounts receivable to net realizable value on the balance sheet and records a corresponding bad debt expense on the income statement. Since we don’t know in advance which specific balances will fail to pay, estimates are the best way to capture expected losses and match them to the period when the sales were made.