How is the allowance for doubtful receivables adjusted?

The correct approach for adjusting the allowance for doubtful receivables involves adding a specific allowance to a general allowance, as this reflects the practice of accounting for potential uncollectible accounts based on specific information about customer accounts and general historical trends in receivables.

This method recognizes that some debts may be definitively uncollectible (specific allowances) while also factoring in an overall expectation of losses across the entire pool of receivables (general allowance). Therefore, the allowance for doubtful accounts is adjusted to reflect both specific known risks and general risks associated with receivables, providing a more comprehensive and accurate representation of potential losses.

Other methods listed, such as estimating total sales or calculating average debtors, do not directly pertain to the adjustment of allowances for doubtful receivables. Moreover, while writing off irrecoverable debts is necessary when specific accounts are confirmed to be uncollectible, it does not serve as a mechanism for adjusting the allowance itself; rather, it reduces the receivables on the balance sheet after an allowance has been established.