How to Calculate Uncollectible Bad Debt Expense
Accrual basis accounting requires sales made on credit to be recorded in the time periods in which they were made, rather than when the cash is collected, so long as certain conditions are met. The conditions are that the revenues must be earned and their source transactions completed, that the sums in question can be estimated to an exact figure, and that the sum is collectible. Sometimes, an account thought to be collectible turns out to be uncollectible, thus necessitating the recording of bad debt expense to account for this phenomenon.
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Instructions
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Record bad debt expense once the account receivable in question is determined to be uncollectible under direct write-off method. For example, if the business receives news that one of its customers, who owes it $200, can no longer afford to make that payment, it then records that as being a $200 bad debt expense and a corresponding deduction to its accounts receivable.
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Estimate the portion of the business's current accounts receivable that are likely to be uncollectible under the allowance method. Businesses rely on their past experiences and trends with bad debt to produce estimates and most do so as a percentage of their accounts receivable. For example, a business might estimate, based on past experience, that 20 percent of its $100,000 in accounts receivable is likely to be bad debt, meaning that it needs $20,000 in allowance for bad debt.
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Record bad debt expense to bring allowance for bad debt in line with estimates under the allowance method. Allowance for bad debt is the portion of current accounts receivable that is estimated to be uncollectible and is adjusted based on an updating estimate. Using the above example where the allowance should be $20,000, if the business had $18,000 in allowance for bad debt from prior periods, it then records $2,000 in bad debt expense and a corresponding increase in allowance for bad debt.
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Tips & Warnings
Once an account receivable is actually determined to be uncollectible, its value is deducted from accounts receivable and a corresponding amount is deducted from allowance for bad debt.
