## Aging Accounts Receivable Method

Under the aging accounts receivable method, the uncollectible expense amount is determined based on the age of the account receivable. The accounts receivable which are old have a greater chance of being bad debt. The probability is distributed among the account receivables depending often their ages.

In general, the longer an account balance is overdue, the less likely the debt is to be paid. Therefore, many companies maintain an account receivable aging schedule, which categorizes each customer’s credit purchases by the length of time they have been outstanding.

Each category’s overall balance is multiplied by an estimated percentage of uncollectibility for that category, and the total of all such calculations serve as the estimate of bad debts or uncollectible expense.

**Example of aging accounts receivable method:**

Age | Account receivables | Probability of uncollectible |

Early 30 days 31 – 60 days 61 – 90 days Over 90 days | Rs. 20,00,000 15,00,000 8,00,000 5,00,000 | 2% 10% 25% 75% |

**Required**: Calculate uncollectible expense amount and prepare journal entry.

**Solution:**

Preparation of aging schedule:

Age | Account receivables | Probability of uncollectible | Uncollectibleexpense amount |

Early 30 days 31 – 60 days 61 – 90 days Over 90 days | Rs. 20,00,000 15,00,000 8,00,000 5,00,000 | 2% 10% 25% 75% | Rs. 40,000 1,50,000 2,00,000 3,75,000 |

Total | Rs. 48,00,000 | Rs. 7,65,000 |

Hence, Uncollectible expense amount = Rs. 7,65,000

Journal entry

Uncollectible expense a/c Dr. Rs. 7,65,000

Allowance for uncollectible expense a/c Rs. 7,65,000

(To record the allowance for the uncollectible expense)

**Another example:**

There is a 90% probability of collection for accounts that are not overdue. For the accounts, up to 30 days or one month past due the probability of collection decreases to 85%. Similarly, for accounts overdue from one month to two months the likelihood of collection is 75%. And for the accounts, past due from two months to three months likelihood of collection decreases to 60%, and for the account past due for more than three months the likelihood of collection is only 40%.

Required: Prepare a schedule of calculation of uncollectible expense amount for the following account receivables.

Current due | Rs. 30,00,000 |

Past due:Up to One month One month to Two Months Two months to Three Months Above three Months | 25,00,000 20,00,000 15,00,000 5,00,000 |

**Solution:**

Age | Accounts receivable | Probability of uncollectible | Uncollectible expense amount |

Current due | Rs. 30,00,000 | 10% | Rs. 3,00,000 |

Past due: Up to 1 month 1 month to 2 Months 2 months to 3 Months Above 3 Months | 25,00,000 20,00,000 15,00,000 5,00,000 | 15% 25% 40% 60% | 3,75,000 5,00,000 6,00,000 3,00,000 |

Rs. 95,00,000 | Rs. 20,75,000 |

**Uncollectible expense amount** = Rs. 20,75,000

**Journal entry**

Uncollectible expense a/c Dr. Rs. 20,75,000

Allowance for uncollectible expense a/c Rs. 20,75,000

(To record the allowance for the uncollectible expense)