Memorandum

To: Controller
Re: Percentage of accounts receivable balance vs. percentage-of-sales
This memorandum presents the comparison of the methods used in estimating uncollectible
accounts. And providing a recommendation intended to be useful to Gabitan, Inc. in
accounting for its uncollectible accounts.
The percentage of receivables method estimates the required ending allowance account
balance to state the accounts receivables at estimated net realizable value at the end of the
reporting period. This method uses a single rate based on the ending balance of accounts
receivable or an aging of accounts. The percentage-of-sales method, on the other hand,
estimates the percentage of credit sales that will be uncollectible based on past experience
and anticipated credit policy to be applied to the net credit sales for the period to determine
the bad debt expense for that period.
Both methods are generally accepted, but based on your company’s situation where the
change in credit policy several months ago in hopes of increasing sales, resulted to an
increase in the number of accounts receivable past due; I believe it would be best if the
percentage of receivables method is observed. The percentage of sales method which is based
on historical and past experiences may not be preferable this time due to the change in credit
policy which may indicate a relationship between sales and bad debt expenses that is different
from prior periods. The use of such method may result to unreliable estimates of future
uncollectible accounts. I therefore recommend the percentage of receivables method on this
matter.
Should you need any further clarifications regarding my recommendation, please do not
hesitate to contact me.