Question

How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?

Short answer

Under both methods, the business entity firstly determines the targeted balance and then adjusts the debit/credit balance of the allowance account to calculate bad debt.

Step-by-step solution

Definition of Bad Debt Expenses

A business entity’s expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables.

Percent of Receivables method

Firstly, we will determine the targeted balance of the allowance account:

$\mathrm{Targeted}\mathrm{balance}=\mathrm{Ending}\mathrm{accounts}\mathrm{receivables}\times \mathrm{Estimated}\mathrm{percentages}$

Now in the second step, we will calculate bad debt expenses:

Particular	Amount $
Targeted balance	xx
Add: unadjusted debit balance of allowance for bad debts	xx
Or
Less: unadjusted credit balance of allowance for bad debts	(xx)
Bad debt expenses

Aging-of-receivables method

Under the aging-of-receivables method, the business entity firstly determines the targeted balance by using the age of each account receivable.

In second step we will determine the bad debt expenses as follows:

Particular	Amount $
Targeted balance	xx
Add: unadjusted debit balance of allowance for bad debts	xx
Or
Less: unadjusted credit balance of allowance for bad debts	(xx)
Bad debt expenses