With the aging of accounts method also an allowance created. Unlike the percentage of sales method, the expense is not booked at time of sales, but at the period’s end instead. In addition, the amount of the expense is not related to the sales, but it is reverse-engineered from a targeted balance of the allowance. The aging of accounts procedure results in an expected uncollectible amount for the accounts receivable at the period’s end. It attributes a probability of uncollectibility depending on the age of the invoice.
The older the invoice, the more likely it is it will be uncollectible. These percentages are again based on past experience. The uncollectible amount for total accounts receivable is the sum of the uncollectible amounts for each individual invoice. The expected uncollectible amount is the target balance of the allowance. The bad debt expense for the period is the difference between the targeted balance of the allowance and the current balance.
Accounts Receivable Aging Method Example
End of year accounts receivable is 250,000. The allowance for uncollectible accounts has a debit balance of 5,000. The ageing of accounts procedure indicates that 7,000 is expected to be uncollectible.
The target balance of the allowance is 7,000 credit. The current balance is 5,000 debit, this means bad debt expense is 12,000.
|Bad debt expense||12,000|
|allowance for uncollectible accounts||12,000|
Aging of Accounts Method Explained
– the aging of accounts method creates the allowance at year’s end; the expense in this method is the amount that is needed to get the allowance to the amount that is expected to be uncollectible