How to Determine a Bad Debt Expense With the Allowance Method
A company calculates bad debt expense to indicate the amount of receivables that it deems uncollectible. Following the allowance method, a company uses the percentage of sales as a way to determine bad debt expense. This allows a company to follow the matching principle by realizing bad debt expense in the same period as the matching revenue, according to the Jacksonville State University website. A company’s bad debt expense is reflected on an income statement, also known as a statement of profit and loss.
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Instructions
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Verify the percentage of accounts receivable that the company thinks will be uncollectible. Companies may rely on financial data from prior years to estimate sales that will go uncollected. The percentage of uncollectible receivables varies from company to company. As an example, assume that the percentage of uncollectible receivables is 2 percent.
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Identify total accounts receivable for the period. An account receivable occurs when a company provides goods and services on credit. For example, a company may sell $200,000 in merchandise on credit during the period.
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Multiply the percentage of uncollectible receivables by the total accounts receivable for the period. In the example, for $200,000 of merchandise sold on credit with 2 percent in uncollectible receivables, the bad debt expense equals $200,000 times 0.02, or $4,000.
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References
- AccountingCoach; What Is the Allowance for Doubtful Accounts?; Harold Averkamp
- Business Accounting Guides; Allowance for Doubtful Accounts and Aging of Accounts Receivable; Kenneth Meunier; August 2011
- PrinciplesOfAccounting.com: Accounts Receivable
- Harper College: Accounting for Receivables
- Jacksonville State University, College of Commerce and Business Administration: The Allowance Method of Accounting for Bad Debts
