Final answer:
When establishing an allowance for receivables, a company should record the full estimated uncollectible amount as a contra asset on the balance sheet and as an expense on the income statement, utilizing historical data and current trends for the estimation.
Step-by-step explanation:
When a business first establishes an allowance for doubtful accounts, also known as an allowance for receivables, the full amount of the allowance should be recorded as a contra asset account on the balance sheet and as an expense in the income statement. The process involves estimating the amount of accounts receivable that may not be collectible in the future. This estimation is based on historical data, industry averages, customer creditworthiness, and current economic trends. To illustrate, if a company estimates that 5% of its $100,000 accounts receivable might be uncollectible, it would create an allowance for receivables of $5,000.