Aging of Receivables Method of Estimating Bad Debts

Aging of Receivables

Aging of receivables is the last method of estimating doubtful accounts. In this method the ending balance of doubtful accounts is obtained by multiplying the various estimated percentages to the breakdown of ending receivables based on their age. The age of receivables is commonly determined based on the number of days the receivables are past due. The computation of bad debts expense is the same as the computation of bad debts expense in the percentage of receivables method, wherein the ending balance of allowance for doubtful accounts is added to the writ-offs. The sum of these accounts minus the recoveries and the beginning balance of allowance for doubtful accounts is equal to bad debt expense. The net realizable value is equal to accounts receivable minus the ending balance of allowance for doubtful accounts. Just like the percentage of receivables, aging of receivable method also favors statement of financial position for it provide a reasonably accurate estimate of receivables. 

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.