Lesson 44: Receivables Method and the Aging Table
In this lesson, we will learn what the aging schedule is, give an example of an
aging table, and learn to record 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.
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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.
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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.
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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.