AC 210 Lecture Notes - Lecture 36: Accounts Receivable
5 Jun 2018
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Estimating Bad Debts—Allowance Method
Percentage of total accounts receivable method. One way companies derive an
estimate for the value of bad debts under the allowance method is to calculate bad
debts as a percentage of the accounts receivable balance. If a company has $100,000
in accounts receivable at the end of an accounting period and company records indicate
that, on average, 5% of total accounts receivable become uncollectible, the allowance
for bad debts account must be adjusted to have a credit balance of $5,000 (5% of
$100,000).
Unless actual write‐offs during the just‐completed accounting period perfectly matched
the balance assigned to the allowance for bad debts account at the close of the
previous accounting period, the account will have an existing balance. If write‐offs were
less than expected, the account will have a credit balance, and if write‐offs were greater
than expected, the account will have a debit balance. Assuming that the allowance for
bad debts account has a $200 debit balance when the adjusting entry is made, a $5,200
adjusting entry is necessary to give the account a credit balance of $5,000.
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