Bad Debts Expense as Percentage of Receivables

Percentage of receivables method is a balance sheet approach to bad debts estimation. It calculates bad debts as a percentage of ending accounts receivable. This is usually done using a procedure called aging of accounts receivable.

Unlike the percentage of sales method, the percentage of receivables method does not directly estimate bad debts expense. This method actually estimates the ending balance of allowance for bad debts account. 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 can also be done using a T-Account. Insert ending balance in the allowance account as calculated using the percentage and calculate the bad debts expense as 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, 20XX, 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 Expense5,000
Allowance for Doubtful Debts5,000

Ending Allowance for Bad Debts = $5,000 + $1,000 = $6,000

Written by Irfanullah Jan