# How to Use the Aging of Accounts Receivable Method for Bad Debts

Under the Aging of Accounts Receivable Method for accounting for bad debts, a company creates an estimate of bad debts based on the age of outstanding invoices. This estimate is based on a company’s Aging of Accounts Receivable report. An Accounts Receivable Aging Report separates outstanding invoices into columns based on the age of the invoices.

Here is an example of an Accounts Receivable Aging Report:

A company uses the Accounts Receivable Aging Report to determine the amount of the estimate for Allowance for Doubtful Accounts. A percentage is applied to each column based on the company’s previous experience with bad debts. More recent invoices have a lower chance of becoming bad debts. Older invoices have a higher chance of becoming bad debts. The percentages are applied to each column to determine the total estimate for the current month.

Here’s an example of applying percentages to the Accounts Receivable Aging Report:

## What is the Journal Entry for Aging of Accounts Receivable Method?

Under the Aging of Accounts Receivable Method, the estimate is updated at the end of each accounting period so it is based on the most recent Accounts Receivable Aging Report. Because the balance in Accounts Receivable is changing regularly as new invoices are created and other invoices are paid, the amount in the Allowance for Doubtful Accounts will always be adjusted, using an adjusting journal entry, to change the balance to the desired amount based on the newest information. The following examples show the journal entries when the account has a zero balance, a credit balance, or a debit balance.

## What is the Journal Entry if the Balance in Allowance for Doubtful Accounts is Zero?

If the balance in the Allowance for Doubtful Accounts is zero, using the Accounts Receivable Aging Report from above, the journal entry recorded to bring the account to its desired balance is:

When this entry is posted in the Allowance for Doubtful Accounts account, the balance will now be a credit balance of \$4,905–the desired balance.

On the Balance Sheet, the Net Realizable Value of Accounts Receivable shows the true value of Accounts Receivable by using the Allowance for Doubtful Accounts to track that value.

## What is the Journal Entry if the Balance in Allowance for Doubtful Accounts is a Credit?

If the Allowance for Doubtful Accounts has a balance from the previous month, the journal entry will be done for the difference between the current balance and the desired balance.

If the Allowance for Doubtful Accounts has a current credit balance of \$4,000 and the desired balance is \$4,905, a journal entry is done for the difference. \$4,905 – \$4,000 = \$905. In the Allowance for Doubtful Accounts, the balance is now \$4,000 + \$950 = \$4,905 (the desired balance.)

On the Balance Sheet, we can see that the desired balance of \$4,905 is reflected in the new balance of the account.

## What is the Journal Entry if the Balance in Allowance for Doubtful Accounts is a Debit?

If the balance in the Allowance for Doubtful Accounts is a debit balance, adjust the balance of the account by doing an adjusting journal entry to bring the balance to the desired balance. If the account has a current debit balance of \$100 and the desired balance is a credit balance of \$4,905, the balance needs to be credited by \$100 to bring the debit balance to zero, and then credited by \$4,905 to increase the balance to the desired balance, a total of \$5,005:

When the Allowance for Doubtful Accounts account has a debit balance, it means that the original estimate did not match up with the reality of what happened with Bad Debts. Because it was an estimate, we can simply make a journal entry to true up the account. When making an adjustment to the account when it has a debit balance, take the balance and add it to the desired balance to determine the journal entry amount.

On the balance sheet, the Allowance account will reflect the desired balance once the account balance is updated with the journal entry.

## How to Write-off Bad Debts Using the Aging of Accounts Receivable Allowance Method

When a specific account is determined to be uncollectible, a company will write-off the amount using a journal entry:

At the end of the month, a new Aging of Accounts Receivable estimate will be re-calculated and the Allowance for Doubtful Accounts will be updated again to reflect the desired balance.

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