How to Estimate Bad Debt Expense
Companies will always have bad debts as long as they make sales by credit. Trying to forecast the amount of bad debt is not always an easy thing. The amount of bad debt can remain consistent over time and then some things and circumstances can change that and increase the amount of your bad debt. To get a reading on your bad debt you have to know as many variables as possible, inside and outside, that have an effect on your bad debt.
Other People Are Reading
Things You'll Need
- Net credit sales report
- Year-end accounts receivable report
- Aging report
Instructions
-
-
1
Get the reports to show the dollar amount of bad debt for the last year. Bad debt can be forecasted based on a percentage. Take net credit sales and multiply that figure by a percentage. If net credit sales were $300,000, multiply that amount by 3 percent and estimated bad debt is $9,000. Bad debt is matched in the same period as sales.
-
2
Review the report showing the accounts receivable balance at year's end. You can estimate bad debt expense by taking a percentage of your accounts receivable balance at the end of the year. Accounts receivables at year end were $500,000, and it is estimated that 3 percent is normally the bad debt amount. Your end-of-year bad debt will be $15,000. The allowance for bad debt will be adjusted to show a credit balance of $15,000.
-
-
3
Calculate your bad debt estimate based on your aging report. Look at each category, such as current accounts and 30, 60, 90 and 120 days past due, and assign a percentage to each category, which is the bad debt estimate or the amount you think will never be collected. The older accounts, such as 90 and 120 days past due, are less likely to pay, so they are assigned a higher percentage.
-
4
Review all reports at year end after your bad debt estimates are made. Track them to see how close you were to your goal. You may have to make some adjustments next time. It's a good idea to understand why you had a variance or discrepancy.
-
5
Take a look at economic conditions and other factors by reviewing "The Wall Street Journal" and bankrate.com. If you are facing times of high unemployment because of a recession, you may want to increase your bad debt expense estimate. Customers are less likely to pay during an economic downturn.
-
1
Tips & Warnings
Estimating bad debts can be difficult. It may take time before you are proficient. You can never know exactly which accounts will not pay
Resources
More Like This
Comments
-
are there any statistics on what percentage of aged trial balance accounts are written off? For example. 5% of all 120 day accounts go to bad debt? 10% of accounts over 120 days, etc?
