Methods to Estimate
Uncollectible Accounts Receivable
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Estimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
Expense
•
Estimate based on a “percent of sales”
•
Estimate based on “analysis of receivables”
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Percent of Sales
One method is the percentage of net credit sales
method.
The percentage used is based on the company's
past experience with uncollectible accounts and
management's assessment of current business
conditions.
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Percent of Sales
Allowance based on a percent of sales
The current period sales is multiplied by an historical rate
of uncollectibility. This results in the amount that we
need to record to the allowance account for the journal
entry. Note that under this method this number is ADDED
to the existing allowance account to arrive at a new
balance in the allowance account. (As opposed to the
“analysis of receivables” method where a new allowance
balance is derived, and then an adjustment is made to the
old balance to bring it in agreement with the new balance)
Under the “percent of sales” method, only the current
period sales amounts are used, as a result it is not as
accurate as looking at 100% of the receivables as in the
“analysis of receivables” method.
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Percent of Sales
Simpson Antiques estimates that 0.80 percent of net
credit sales will be uncollectible.
Net credit sales for the year were $100,000.
The estimated expense for uncollectible accounts is
$800 (0.0080 x $100,000).
Uncollectible Accounts Expense
$800
Allowance for Doubtful Accounts
$800
To record the allowance for uncollectible accounts
based on percent of sales.
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Analysis of Receivables
Allowance based on the analysis of ALL aged receivables
(1) The first step is to age the receivables into categories of
how old they are. Each account that is over a specific
number of days past due is scrutinized and considered for
write off purposes.
(2) The next step is to apply historical or industry % of
uncollectibility to all of the totals of the various aging
categories. When the amounts of estimated uncollectibles
are added up, it will result in the amount that the Allowance
account SHOULD BE. Based on the current balance in the
allowance account, an adjustment is made for the
DIFFERENCE for whatever it takes to get the allowance to
the amount calculated based on the aging of the accounts
receivable.
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Summary
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
Expense
1. Estimate based on a “percent of sales”
If credit sales for the period are $300,000 and it is estimated that
1% will be uncollectible, the Uncollectible Accounts Expense is
$3,000.
2. Estimate based on “analysis of receivables”
If it is estimated that $3,390 of the receivables will be
uncollectible and the Allowance for Uncollectible Accounts prior
to the adjustment is $510, the Uncollectible Accounts Expense
is $2,880 ($3,390 new estimated uncollectible balance – $510 old
uncollectible balance).
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