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Magazine Chapter 8: 17RQ (page 465)
How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
Short Answer
Under both methods, the business entity firstly determines the targeted balance and then adjusts the debit/credit balance of the allowance account to calculate bad debt.
Step by step solution
Definition of Bad Debt Expenses
A business entity鈥檚 expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables.
Percent of Receivables method
Firstly, we will determine the targeted balance of the allowance account:
Now in the second step, we will calculate bad debt expenses:
Particular | Amount $ |
Targeted balance | xx |
Add: unadjusted debit balance of allowance for bad debts | xx |
Or | |
Less: unadjusted credit balance of allowance for bad debts | (xx) |
Bad debt expenses |
Aging-of-receivables method
Under the aging-of-receivables method, the business entity firstly determines the targeted balance by using the age of each account receivable.
In second step we will determine the bad debt expenses as follows:
Particular | Amount $ |
Targeted balance | xx |
Add: unadjusted debit balance of allowance for bad debts | xx |
Or | |
Less: unadjusted credit balance of allowance for bad debts | (xx) |
Bad debt expenses |
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