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Percent of Receivables Method

In the percent of receivables method, you estimate the amount of uncollectible accounts by determining the balance in the allowance for doubtful accounts ledger account based on a percentage of accounts receivable. This method is also called a balance sheet method and is described in the following example:

• Your company’s net credit sales in 2017 totaled $100,000.
• Accounts receivable on December 31, 2017, totaled $60,000.
• Allowance for doubtful accounts had a balance of $0 on December 31, 2017.

During 2018, the following things occurred:

• You wrote off the account of Chase Marley: $1,000 on March 31.
• You wrote off the account of Ryan Stevenson: $350 on May 15.
• On September 30, 2018, Ryan Stevenson paid $350.

In addition,

• accounts receivable on December 31, 2018, totaled $50,000 and
• you've estimated that 1.5% of the balance in accounts receivable at the end of each year will prove uncollectible.

You will record the estimated bad debt expense for both 2017 and 2018.

You would record the following adjusting entry on December 31, 2017, to note estimated bad debt expense:

The dollar amount was calculated as follows:

$\mathrm{Balance\; in\; accounts\; receivable}\times \mathrm{percent\; deemed\; uncollectible}$

$\$60,000 \times 1.5\%=\$900$

The $900 was used for the entry because the allowance for doubtful accounts had a balance of $0 on December 31, 2017, prior to the adjusting entry. The $900 calculated is your estimate for the balance in the allowance for doubtful accounts ledger account after the adjusting entry.

During 2018, the following accounts were determined to be uncollectible and were written off:

• Chase Marley, $1,000 on March 31, and
• Ryan Stevenson, $350 on May 15.

You would prepare the following journal entries to write off these accounts:

What happens if Ryan Stevenson pays you on September 30? You would record the following transaction:

The first entry on September 30 reverses the entry you recorded on May 15 to write off the account. The second entry records the receipt of the cash.

At the end of 2018, you have the following balance in the allowance for doubtful accounts ledger account:

You estimated that $900 worth of accounts from 2017 sales would be uncollectible in 2018. During 2018, $1,000 worth of accounts proved uncollectible, leaving you with a debit balance of $100 in the allowance for doubtful accounts ledger account.

The ending balance in allowance for doubtful accounts can be either a debit or a credit. If the balance is a debit, it means that you've underestimated uncollectible accounts for the year. If the balance is a credit, it means that you've overestimated uncollectible accounts for the year.

You can now estimate the balance for the allowance for doubtful accounts ledger account at the end of 2018 and use this ending balance to calculate the dollar amount for the adjusting entry on December 31, 2018.

As noted previously, the balance for accounts receivable on December 31, 2018, is $50,000, and you've estimated that 1.5% of accounts receivable will prove to be uncollectible during the next year (2019). To calculate the dollar amount for the adjusting entry, you would do the following things:

1. Determine the ending balance in allowance for doubtful accounts after the adjusting entry using a percentage of accounts receivable. You've determined that 1.5% of the $50,000 balance in accounts receivable will prove uncollectible. The ending balance in allowance for doubtful accounts after the adjusting entry will be $50,000 x 1.5%, or $750. This will be a credit balance.
2. Determine the amount needed to give the allowance for doubtful accounts a credit balance of $750. If the allowance for doubtful accounts balance were a debit of $100, you would need to credit the account by $850.
3. Record the adjusting entry shown below: