Percent-of-Receivables Method

Definition: Method of estimating bad debts based on the ending balance of accounts receivable. The calculated amount represents the desired ending balance in t…

Scope:NarrowDifficulty:Moderate

Method of estimating bad debts based on the ending balance of accounts receivable. The calculated amount represents the desired ending balance in the allowance account, not the expense for the period.

Common Journal Entries
AccountDebitCredit
1. Compute target allowance
A/R $180,000 × 5% = $9,000 target; current allowance $2,400.
Bad Debt ExpenseExpense+$6,600
Allowance for Doubtful AccountsContra Asset+$6,600
$9,000 − $2,400 = $6,600 adjustment. Focuses on correct balance-sheet value.

T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.

Bad Debt ExpenseBad Debt ExpenseExpenseA cost incurred in the process of earning revenue. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$6,600.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$6,600.00
Allowance for Doubtful AccountsAllowance for Doubtful AccountsLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$6,600.00
Normal bal. ▶
$6,600.00

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