Estimating bad debts can be done by the percentage of sales method and the aging of accounts receivable method. 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.

Year                                    Accounts Receivable                             Allowance               Percent of A/R

2014                                         4,500,000                                            450,000                   10.0%

2015                                         5,200,000                                            600,000                    11.5%  

2016                                         7,500,000                                            950,000                    12.7%