How do you calculate the allowance for bad debt reserve using the percentage of accounts receivable method?
This method computes the estimated allowance for uncollectible accounts based on the amount of year-end accounts receivables. This amount will be the amount that will compute as the year-end allowance account balance. You will then be able to back into the current year expense (aka the recorded bad debt expense).
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How to calculate the allowance for bad debt reserve using the percentage of sales method?
Under the percentage of sales method, the company would multiply the amount of credit sales in the year by the bad debt expense % estimate. The company would then record the additional bad debt expense to the income statement and increase the allowance reserve.
What are the methods used to estimated bad debt under the allowance method?
The allowance method is the option that is allowed under U.S. GAAP. U.S GAAP leaves it up to the company to determine how they want to implement the allowance method. There are three common options include the percentage-of-sales method, the percentage-of-AR method, and the aging of AR method: