Question

Create an example of how to estimate and record uncollectible accounts using the AGING OF RECEIVABLES METHOD by addressing the following points:

1. Calculate your estimate and include all detail to support your calculation.

2. What account should be DEBITED, and for how much money?

3. What account should be CREDITED, and for how much money?

Answer 1

Assume following is the account receivable aging schedule of xyz ltd for the year ended December 31, 2020 :

Age of Account	$	Estimated % of Uncollectible	Est. amount uncollectible
Less than 30 days	$2500000	0.5%	$12,500
31-60 days	$1,000,000	1%	$10,000
61-90 days	$500,000	3%	$15,000
91-120 days	$100,000	8%	$8,000
Greater than 120 days	$50,000	11%	$5,500
Totals	$4,150,000		$51,000

Now assume that XYZ ltd has a credit balance of $3,000 before adjustment in the allowance for uncollectible accounts . Total estimated uncollectible amount as per the table is $51000. At the end of the year, allowance for uncollectible accounts on the balance sheet needs to show $51000 .Since the allowance account already has $3000 credit balance, only $48000(51000-3000) is credited using the adjusting entry at the end of the period.

Account Names	Debits	Credits
Bad debt expense	48,000
Allowance for uncollectible accounts		48,000

Instead of credit balance if allowance account had a debit balance of $3,000:

Bad debt expense=$54,000 ($51,000 + $3,000).

Account Names	Debits	Credits
Bad debt expense	54,000
Allowance for uncollectible accounts		54,000

Either case , allowance for uncollectible accounts will have a credit balance of $51000 at the end.

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