work of the collection department.
The value of the analysis in cases (1) and (2) is based on the
principle that the longer an item is overdue, the greater is its
likelihood of proving uncollectible. The need of an increasing rate
for the different classes as analyzed above is apparent. In case (3)
its value lies in the fact that it reveals the general effect of the
collection policy and incidentally points out any change in policy.
Any additional factors which may have wrought a change in the general
financial situation must, of course, be taken into account.
Basis of Estimate of Bad Debts
Three methods of making an estimate of bad debts are found, in all of
which a percentage of some given base is used. The various bases are
respectively: