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…
NarrowModerate
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
| Account | Debit | Credit |
|---|---|---|
| 1. Compute target allowance | ||
| A/R $180,000 × 5% = $9,000 target; current allowance $2,400. | ||
| Bad Debt Expense | $6,600 | |
| Allowance for Doubtful Accounts | $6,600 | |
| $9,000 − $2,400 = $6,600 adjustment. Focuses on correct balance-sheet value. | ||
Related Subjects
Components
- Accounts ReceivableA/R balance is the base for the percentage calculation
Related
- Aging-of-Receivables MethodBoth are balance-sheet approaches; aging uses multiple buckets
- Allowance MethodThis is one specific approach within the allowance method
Contrast
- Percent-of-Sales MethodSales method is income-statement; receivables method is balance-sheet
Produces
- Allowance for Doubtful AccountsCalculates the target allowance balance
External Links
- Bad debt#Allowance method — Wikipedia