Bad Debts as Percentage of Receivables
The percentage of receivables method of accounting for bad debts is a balance sheet approach to estimate the bad debts expense. It calculates the closing bad debts allowance as a percentage of ending accounts receivable. This percentage to be applied to accounts receivable is usually obtained from a procedure called aging of accounts receivable.
Unlike the percentage of sales method which estimates bad debts expense, the percentage of receivables method does not directly estimate the bad debts expense but estimates the closing balance of the allowance for bad debts instead. The estimated bad debts expense is then calculated as shown below:
Ending Balance of Allowance for Bad Debts A/C
− CR Balance in Allowance for Bad Debts; or
+ DR Balance in Allowance for Bad Debts
= Bad Debts Expense
The above calculation may also be performed using the T-account for bad debts allowance account by entering the ending balance in the allowance account as calculated using the percentage and then calculating the bad debts expense as the balancing figure.
The journal entry to record the bad debts expense as calculated above is:
| Bad Debts Expense | —— | |
| Allowance for Doubtful Debts | —— |
Example
On year end Dec 31, 20X0, Company λ estimated that $6,000 of its accounts receivable will remain uncollectible. The current balance in allowance for bad debts account is $1,000 CR. Calculate the bad debts expense and pass the adjusting entry to record the bad debts expense.
Solution
Bad Debts Expense
= $6,000 − $1,000
= $5,000
Adjustment Journal Entry:
| Bad Debts Expense | 5,000 | |
| Allowance for Doubtful Debts | 5,000 |
Ending Allowance for Bad Debts
= $5,000 + $1,000
= $6,000
by Irfanullah Jan, ACCA and last modified on