Percent of Receivables Method of Estimating Bad Debts

Percent of Receivables

Another method of estimating the doubtful accounts is the percentage of receivables method. In this method the product of account receivable and the percentage of receivables is the ending balance of allowance for doubtful accounts. The ending balance of allowance for doubtful accounts is used to determine the bad debt expense. The bad debt expense is computed by adding the ending balance of allowance for doubtful accounts to the write-offs and deducting the recoveries and the beginning balance of doubtful accounts. The net realizable value of accounts receivables is computed as accounts receivables minus the ending balance of allowance for doubtful accounts. This method favors the statement of financial position for it provides a reasonably accurate of estimate of receivables. In this method bad debts are recognized based on the ending balance of receivable and not directly on the sales recognize in the period.