Certified Government Financial Manager (CGFM) Practice Exam 2026 – Your All-in-One Guide to Exam Success!

The method that involves recording the allowance for bad debts based on a historical percentage of bad debts multiplied by total sales is known as the percentage of sales method. This approach uses the company's past experiences with uncollectible accounts to estimate future bad debts as a function of current sales.

When using this method, the organization calculates a percentage based on historical data, which reflects the relationship between sales and bad debts observed in the past. This percentage is then applied to the total sales figure for the current accounting period to determine the amount of the allowance for doubtful accounts that should be recorded. This allows the company to proactively anticipate losses due to credit sales that are unlikely to be collected and provides a more accurate representation of expected expenses related to accounts receivable.

This method is particularly useful for businesses with consistent trends in sales and bad debt expenses, making it an effective tool for financial management and reporting in a governmental context.