A company that notices that some of its customers will not pay the agreed-upon sales price must make use of the allowance method of accounting.
The allowance method is a strategy of putting up a reserve for potential consumer debt in the future. The reserve is calculated based on the sales percentage generated in a given reporting period, may be modified for the risk related to specific clients.
The allowance method calculates the provision for uncertain accounts by multiplying and scaling the accounts receivable by the correct percentage for the aging period and then adding the two totals altogether.
Therefore, a company that notices that some of its customers will not pay the agreed-upon sales price must make use of the allowance method of accounting.
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