The percentage of outstanding receivables approach , also known as the balance sheet approach, provides a reasonably accurate estimate of the net realizable value of receivables shown on the balance sheet. The amount of expense recorded is determined by the method used. The amount recorded as bad debt expense under the percentage of sales method is the amount determined by multiplying the estimated percentage times the credit sales. The unadjusted ending balance in the allowance account must be considered in arriving at bad debts expense for the year under the outstanding receivables approach. Notes Receivables Trade notes receivables are notes that represent a formal promise to pay and bear an interest element because of the time value of money.
Notes can have interest equal to the effective rate or interest different from the effective rate.
Long-term notes receivable are recorded at the present value of the future cash flows. Long-term notes receivable should be recorded and reported at the present value of the future cash flows. A discount or a premium is recorded and amortized over the life of the note to approximate the effective interest rate when there is a difference between the face value and the cash exchanged. The discount or premium is shown on the balance sheet as a direct deduction from or addition to the face of the note. Notes receivable can be issued with zero interest rate stated or at a stated rate that is unreasonable.