Estimating bad debts can be done by the percentage of sales method and the aging of accounts receivablemethod. Each method has its drawbacks and advantages.

If the company you were reviewing used the percentage of sales method and you noted that the allowance shown on the balance sheet was growing disproportionately to the accounts receivable give possible reasons for the disproportionate growth and suggest a means to adjust this situation if necessary.

See example below.

YearAccounts ReceivableAllowancePercent of A/R

20144,500,000450,00010.0%

20155,200,000600,00011.5%

2016 7,500,000 950,00012.7%