There are several methods of estimating uncollectibles. The most commonly used methods base their estimates on sales data or the age of the receivables. Estimates based on sales figures can be determined by taking a percentage of either total sales or credit sales. An estimate of uncollectibles based on an analysis of receivables, classifies accounts into outstanding age groups. The longer a receivable is past due, the higher the probability of nonpayment. If the estimate is larger than the balance of the Allowance for Doubtful Accounts, the excess should be debited to the Uncollectible Accounts Expense and credited to the Allowance for Doubtful Accounts.
a. Percentage of sales method
Example:
Company EP assumes that 5% of total sales will not be collected. Sales for the year was $500,000.
Journal entry
| Debit | Credit | |
| Bad debts expense | $25,000 | |
| Allowance for bad debts | $25,000 |
b. Aging schedule method
Aging schedule of accounts receivable determines the likelihood of the receivables' collection or the probability of the customers’ default of payments based on the company’s credit policy.
Example:
Company A evaluates the percentage of bad debts based on the age of accounts receivable balances. This is done to record the approximate value of the allowance for doubtful accounts.
| Age of Balance | Balance | % of Doubtful Accounts | Allowance |
| 30 days | $95,000 | 2% | $1,900 |
| 31 – 60 days | $50,000 | 4% | $2,000 |
| 61 – 90 days | $18,000 | 7% | $1,260 |
| Over 90 days | $ 7,000 | 12% | $ 840 |
| Total | $170,000 | $6,000 | |
Journal entry to record allowance
| Debit | Credit | |
| Bad debts expense | $6,000 | |
| Allowance for bad debts | $6,000 |
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