Lesson Objectives:- What the aging schedule is.
- Example of an aging table
- Recording the T-account balance and bad debts expense.
When reviewing the percentage of receivables method, I mentioned previously that the aging schedule is used to calculate the amount for the bad debts expense. Essentially, the longer the debt is outstanding, the less likely it will be that the company will receive the cash.
The aging method is used to break down the receivable balances based on the age and uncollectible risk associated with each age range. This is the most accurate way to use the percentage of receivables method, as it considers the risk level associated with the bad debt based on how long the balance has been outstanding.
Next, we will be reviewing a real-life example of an aging table and how it applied to the receivables method to record the bad debts expense journal entry.
Above is an example of an aging table that details the balances of accounts receivables based on how long they have been outstanding. Let's assume that the beginning allowance for doubtful accounts is a $5,000 credit. In this case, we have $396,000 not yet due, $90,000 aged between 1-30 days, $30,000 between 31-60 days and so on.
The longer that a balance is outstanding, the less probable it is that the company will receive the cash. This explains why the estimated uncollectible percentage increases based on the age of the receivables balance.
In order to calculate the actual amounts for estimated uncollectibles, we simply multiple the balance by the estimated percentage. For example, $396,000 x 0.01 = $3,960. You can see the calculations in the added column below. We would sum up all the amounts to find the total estimated uncollectibles of $14,360.
Now that we've come up with the total amount of estimated uncollectibles, let's use the T-account format to calculate the adjustment for AFDA. We would first record the beginning allowance of $5,000 and then the ending balance of $14,360.
Again, the difference between the ending balance and the beginning amount will be the adjustment entry. In this example we would calculate the adjustment amount by subtracting 5,000 from 14,360 to come up with an adjustment amount of $9,360.
We have the adjustment amount of $9,360, now we will use this to record the journal entry for the bad debts expense. The bad debts expense account would be debited by $9,360 and the AFDA would be credited by $9,360.
This journal entry reflects the estimation of the uncollectible accounts that we calculated using the receivables method and aging schedule.
This example should give you a much better understanding of how the bad debts expense value is calculated based on the receivables method and aging schedule. Again, using the aging table is the most accurate way of using the percentage of receivables method as it accounts for the age of the debt.