Question

How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?

Answer 1

Percent of receivable method;

Under this method, amount of bad debt is calculated on the basis of ending balance of accounts receivable. As we know that in the balance sheet there are amount of of accounts receivable. And on the basis of some certain percentage we can calculate amount of uncollectible.

For better understanding let’s take an example;

Ending balance of account receivable = $50000

Balance in allowance for bad debt account (Cr.) = $1000

It is estimated that 5% of account receivable may be uncollectible then bad debt expense will be calculated as follow;

($50000 * .05) = $2500

$2500 - $1000 = $1500

Thus bad debt = $1500

Aging of receivable method;

Under aging of accounts receivable method you quickly can divide all receivables into various classes on the basis of number of days money pending on them. So after such classification we can see various groups of accounts receivable such as 1 - 30 days, 31 – 60 days, 61 – 90 days etc. After such classification we can make an estimation on the basis of past records that what percent of such group is uncollectible.

Hence on the basis of such classification and probability of uncollectible we will get amount of bad debts.