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.
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