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Percentage of Accounts Receivable Method
Under the percentage of accounts receivable method, a company derives an estimate for the value of bad debts under the allowance method to calculate bad debts as a percentage of the account receivable balance.
For example, if a company has Rs. 1,00,000 in accounts receivable at the end of an accounting period and company records indicate that, on average, 5% of total accounts receivable become uncollectible. The allowance for bad debt accounts must be adjusted to have a credit balance of Rs. 5,000 (5% of 1,00,000).
In other words, under the percentage of accounts receivable method, allowance of the uncollectible expense account is determined as a certain percentage of the outstanding accounts receivable amount. The outstanding amount of account receivable was determined as:
| Beginning accounts receivable Add: Total receivable during the year Less: Cash collected from customers or receivables | xxx xxx xxx |
| Ending accounts receivable | xxx |
Depending upon the company’s past experience the percentage of accounts receivable for estimated allowance for uncollectible expense amount deferred.
Allowance for the uncollectible expense under the percentage of accounts receivable method is determined as ending accounts receivable multiplied by the fixed percentage of the uncollectible expense. Also, as shown below:
Sometimes credit balance of allowance is given in the question. In that case allowance for the uncollectible expense, the amount is calculated by deducting the credit allowance amount from the total amount of the uncollectible expense amount.
Example 1
The total sales revenue during the year of a company is Rs. 20,00,000. The allowance for uncollectible expense accounts (Cr.) is Rs. 2,000. The net credit sales are 60% of the total sales. However, the ending account receivable is Rs. 4,00,000.
Required: Calculate the estimated amount of allowance for the uncollectible expense and prepare journal entries. Assuming that 5% of accounts receivable is estimated as the uncollectible expense.
Solution:
Here,
Ending account receivable = Rs. 4,00,000
Estimated percentage of uncollectible = 5%
Allowance for uncollectible expense (Cr.) = Rs. 2,000
Now,
Total amount of allowance for uncollectible expense = 5% of 4,00,000 = Rs. 20,000
Net allowance for uncollectible expense = Rs. 20,000 – 2,000 = Rs. 18,000
Journal entry:
Uncollectible expense a/c Dr. Rs. 18,000
Allowance for uncollectible expense a/c Dr. Rs. 18,000
(To record the allowance for the uncollectible expense)
Example 2
During the year 2019, A Company made total sales of Rs. 12,00,000 of which 80% are on credit. The Company collected cash of Rs. 9,40,000 from the open account in that year. In the year 2019, it has also written off Rs. 10,000 as an uncollectible account. And, it has accounts receivable of Rs. 1,90,000 and an allowance for the uncollectible expense (Cr.) of Rs. 14,000 at the end of 2018. The company’s past experience shows that 6% of its ending balance of accounts receivable is expected to be a doubtful debt account.
Required: Calculate the estimated amount of uncollectible expense for the current year and prepare the necessary journal entries.
Solution:
Here,
Sales = Rs. 12,00,000
Credit sales = 80% of 12,00,000 = Rs. 9,60,000
Cash collected = Rs. 9,40,000
Written off = Rs. 10,000
Beginning account receivable = Rs. 1,90,000
Allowance for uncollectible expense (Cr.) = Rs. 14,000
Calculation of ending balance of account receivable
| Beginning balance of account receivable Add: Credit sales Less: Cash collected Less: Written off | Rs. 1,90,000 9,60,000 9,40,000 10,000 |
| Ending balance of account receivable | Rs. 2,00,000 |
Now,
| Allowance for uncollectible expense (6% of 2,00,000) Less: Allowance for the uncollectible expense (Cr.) Add: Bad debt written off | Rs. 12,000 14,000 10,000 |
| Allowance to be made for the year | Rs. 8,000 |
Journal entry:
Uncollectible expense a/c Dr. Rs. 8,000
Allowance for uncollectible expense a/c Rs. 8,000
(To record the allowance for the uncollectible expense)