Your Ask Joey ™ Answer

How to prepare the allowance for doubtful accounts balance using the AR aging method?

The AR aging method is one of the allowance methods that is allowed under US GAAP. The method is tested on the FAR section of the CPA exam, and students in accounting courses are often tested on this concept as well.

The AR aging method focuses on the balance sheet. This method categorizes the expenses based on a schedule that categorizes the number of days or months outstanding. Management would apply a percentage uncollectible estimate to each aging bucket. You would then add up the expected uncollectible amount for each bucket to determine the ending ADA balance. You will then need to prepare the ADA rollforward to determine what the adjustment to bad debt expense for the period would be.

Example AR Aging Method

Step 1) Well start by using the % uncollectible estimates from management and applying it to the applicable aging bucket to calculate the ending allowance for doubtful accounts balance, which is the SUM of the allowance amount for each aging bucket.

Step 2) We will then plug this information into the ADA rollforward. Our beginning balance was $40,000 and if the ending ADA balance is $55,000, that means the company needs to record additional bad debt expense of $15,000.

The journal entry to increase the allowance for doubtful accounts balance from $40,000 to $55,000 would be a debit to bad debt expense for $15,000 and a credit to allowance for doubtful accounts for $15,000. This entry assumes that the $40,000 beginning balance was the unadjusted balance on the company’s trial balance at the end of Year 5.


Back To All Questions

You might also be interested in...

  • CECL Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)

  • Journal Entry for Direct Materials Variance

    Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...

  • Understanding Variance Analysis

    Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...