In the aging of receivables method, you estimate the amount of uncollectible accounts by determining the balance in the allowance for doubtful accounts ledger account based on the aging of accounts receivable. This method is described in the following example.
You will be preparing your adjusting entry for bad debts expense on December 31, 2018. Your company estimates uncollectible accounts receivable using the aging of accounts receivable method. To begin, you review all of your accounts receivable based on whether they are still current (1–30 days), up to 30 days late (31–60 days), 31 to 60 days late (61–90 days), or over 90 days late. You estimate a percentage that you believe will become uncollectible for each category (column). For example, company history indicates that you should expect to collect 99% of all current accounts receivable (1–30 days). The great majority of your customers pay on time. Once they are late, the percentage of uncollectible accounts will increase. Below is a schedule of the age of accounts receivable for your company on December 31, 2018:
| Customer name | 1–30 days | 31–60 days | 61–90 days | over 90 days | Total balance |
|---|---|---|---|---|---|
| Schmidt | $10,000 |
-
|
-
|
-
| $10,000 |
| Stocker |
-
| $5,000 |
-
|
-
| $5,000 |
| Allen | $8,000 |
-
|
-
|
-
| $8,000 |
| Roberts |
-
|
-
| $2,000 |
-
| $2,000 |
| Klein |
-
|
-
|
-
| $200 | $200 |
| Totals | $18,000 | $5,000 | $2,000 | $200 | $25,200 |
| Estimated % uncollectible | 1% | 1.5% | 5% | 50% |
-
|
| Estimated total uncollectible | $180 | $75 | $100 | $100 | $455 |
Based on the schedule of the age of accounts receivable, you believe that the balance in the allowance for doubtful accounts after the adjusting entry should be $455. Your allowance for doubtful accounts ledger account prior to the adjusting entry is shown below:
|
debit transaction number
| D | C |
credit transaction number
|
|---|---|---|---|
|
-
|
-
| $100 | Dec. 31, 2017 (AJE) |
|
-
| This is the ending balance prior to adjusting entry. | ||
The amount for the adjusting entry on December 31, 2018, is calculated as follows:
The balance prior to the adjusting entry could be either a debit or a credit, which affects the calculation of the dollar amount.
The adjusting entry for bad debt expense on December 31, 2018, is shown below:
| Date | Accounts and explanation | Debit | Credit |
|---|---|---|---|
| December 31, 2018 | Bad debt expense | $355 |
-
|
|
-
|
Allowance for doubtful accounts
|
-
| $355 |
|
-
| To record bad debt expense for the period |
-
|
-
|
The allowance for doubtful accounts ledger account after the adjusting entry is shown below:
|
debit transaction number
| D | C |
credit transaction number
|
|---|---|---|---|
|
-
|
-
| $100 | Dec. 31, 2017 (AJE) |
|
-
| prior to adjusting entry | ||
|
-
|
-
| $355 | Dec. 31, 2018 (AJE) |
|
-
|
-
| $455 | Dec. 31, 2018 |
|
-
| after adjusting entry | ||