How to Calculate an Allowance for Bad Debt Based Off of AR Aging

by Jeff Franco J.D./M.A./M.B.A. ; Updated April 19, 2017

Pursuant to Generally Accepted Accounting Principles (GAAP), companies can estimate their bad debt expense using the allowance method. A common way of applying the allowance method is to estimate the bad debt expense is to analyze an aging Accounts Receivable (AR) report. An aging AR report provides accountants with a comprehensive view of the outstanding receivable balances and the number days they are past due.

Step 1

Estimate the percent of the AR balance that is uncollectible. To estimate the percent of your company’s current AR balance that is uncollectible, you must analyze the aging AR report. For example, if the AR balance is $1 million, of which $20,000 is more than four months past due, it’s reasonable to estimate that 2 percent of the AR balance will never be collected.

Step 2

Create the journal entry for your bad debt estimate. Your journal entry must increase the allowance for doubtful accounts, which is a contra-asset account to AR on the balance sheet, and the bad debt expense account, which reduces the company’s net income on the profit and loss statement. Prepare a credit entry to the allowance account to increase the balance and a debit entry to the bad debt expense account.

Step 3

Reduce the AR balance when debts become worthless. A journal entry is necessary to reduce the balance of the AR account once the company decides to permanently write off an invoice. For example, after eight months of unsuccessful attempts to collect on a $10,000 invoice, the company may decide that it’s time to just write it off. You do this by recording a credit entry to the AR account for $10,000, and a corresponding debit entry to the allowance account.

Step 4

Increase the AR balance for future collections. If the company eventually recovers all, or part, of the $10,000 invoice, you must make a debit entry to AR for the amount the company collects. You must also make a credit entry of the same amount to the allowance account. The balance in the allowance account reflects the amount of bad debts the company estimates it will write off before the end of the fiscal year. And since the customer ultimately pays the invoice, it’s unnecessary to use up the balance of the allowance account for the invoice.

Tips

  • Companies often report a net accounts receivable balance that reports the balance of the AR account, minus the balance of the allowance for doubtful accounts account.

Warnings

  • Accountants use allowance for doubtful accounts to record estimates only. However, you never make an entry to the AR account until the company makes a final determination that a specific debt is uncollectible.

Items you will need

  • AR aging report
  • Trial balance that includes AR account

References

About the Author

Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.

Cite this Article | raiffeisen-cards.ru A tool to create a citation to reference this article Cite this Article

Related pages


dividend rate on preferred stock formulawifi credit card readerarizona foreclosure timelinewhat is a k1 tax form used fordiscover credit card atmcalifornia noise complaint lawshow much tax to pay on 401k withdrawalpsecu account numberhow to evict a tenant in varoth ira simple explanationrotating credit cardshow to calculate cumulative preferred stock dividendsgiving bank account number safegeico car rental coveragetax write offs for real estate agentsmy ny state tax refundsupermarket loyalty cardscosigner credit scorebluecrossblueshieldtxclaiming 0 or 1 on w4average electric bill for one bedroom apartmentva benefits for 100 disabled veteransdo i qualify for ahcccstrack my order pacsunaccounting for deferred rentaverage yearly return of the stock marketdo magnets ruin credit cardsnc medicaid income limitsirs form 3468navajo nation scholarshipunlevered wacc formulawalmart donations request formtops check cashingshare buyback investopediahow to calculate discount pointsindenture bondex dividend share price calculationmassmutual 401k hardship withdrawalwhat are the disadvantages of online bankingfile taxes using last pay stubwells fargo florida routing numberhow much can i earn at full retirement agecalculate take home pay massachusettsfinra series 7 license expirationdeposit for enterprise car rentalnorth carolina garnishment lawscounter offer example letterdonatingplasma.orggrants for marching band uniformsnaia rulespri for nursing homescholarships for grandchildren of vietnam vetsamerichoice tenncaremortgage lenders for low incomewhat is the gross rent multipliercredit report derogatoryeviction notice meaningh&r block efile statuswhat is medexhow to buy stuff with stolen credit cardhedge fund salarydoes annual mileage affect car insurancesample solicitation letter for financial assistancehow to detect counterfeit canadian moneywhat is ois ratefair value hedge examplemarginal revenue calculatorillinois income tax calculatorcoupon for disneylandmbs trackinghow to get your insurance to pay for breast reductionmetrobank credit card types

Related pages


dividend rate on preferred stock formulawifi credit card readerarizona foreclosure timelinewhat is a k1 tax form used fordiscover credit card atmcalifornia noise complaint lawshow much tax to pay on 401k withdrawalpsecu account numberhow to evict a tenant in varoth ira simple explanationrotating credit cardshow to calculate cumulative preferred stock dividendsgiving bank account number safegeico car rental coveragetax write offs for real estate agentsmy ny state tax refundsupermarket loyalty cardscosigner credit scorebluecrossblueshieldtxclaiming 0 or 1 on w4average electric bill for one bedroom apartmentva benefits for 100 disabled veteransdo i qualify for ahcccstrack my order pacsunaccounting for deferred rentaverage yearly return of the stock marketdo magnets ruin credit cardsnc medicaid income limitsirs form 3468navajo nation scholarshipunlevered wacc formulawalmart donations request formtops check cashingshare buyback investopediahow to calculate discount pointsindenture bondex dividend share price calculationmassmutual 401k hardship withdrawalwhat are the disadvantages of online bankingfile taxes using last pay stubwells fargo florida routing numberhow much can i earn at full retirement agecalculate take home pay massachusettsfinra series 7 license expirationdeposit for enterprise car rentalnorth carolina garnishment lawscounter offer example letterdonatingplasma.orggrants for marching band uniformsnaia rulespri for nursing homescholarships for grandchildren of vietnam vetsamerichoice tenncaremortgage lenders for low incomewhat is the gross rent multipliercredit report derogatoryeviction notice meaningh&r block efile statuswhat is medexhow to buy stuff with stolen credit cardhedge fund salarydoes annual mileage affect car insurancesample solicitation letter for financial assistancehow to detect counterfeit canadian moneywhat is ois ratefair value hedge examplemarginal revenue calculatorillinois income tax calculatorcoupon for disneylandmbs trackinghow to get your insurance to pay for breast reductionmetrobank credit card types
"].join(""));l.close()}catch(m){b.src=a+'d.write("'+loaderHtml().replace(/"/g,String.fromCharCode(92)+'"')+'");d.close();'}b.contentWindow.config=k;b.contentWindow.SCRIPT_ID=g},0)}}}(); window.usabilla.load("w.usabilla.com", "4a73c8c43a12"); /*]]>{/literal}*/