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After talking about the percentage of sales method we talk about the percentage of receivables method. Instead of using net sales, we look at the receivables that we have and use a certain percentage.
The TRICKY part about this approach is that when you calculate the percent by the receivables, unlike the sales method, it gives you the ENDING allowance for doubtful accounts number. Therefore, you have to find the adjustment which is just some simple subtraction!
The reason is because unlike the sales method, A/R is not a temporary account like sales, its a permanent one. If it were a temporary account then the number would be the adjustment because that percentage of receivables would represent the TOTAL estimated uncollectibles for the year. Instead what we're doing is multiplying the rate by TOTAL receivables which means its not just the uncollectibles for THIS year but the estimated for ALL receivables which is why the value goes in the ending balance slot!
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