Normally, two techniques are provided for estimating allowance for cynical accounts – aging an approach and sales method. ~ above this page, we shall define howcompanies use aging an approach for calculating their pin money for unconvinced accounts. Click right here if you want to read about the use of sales method.

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Explanation of aging method

The aging technique (also described as balance sheet approach) classifies account receivable right into differentage groups. Follow to this approach, the longer the period for i beg your pardon an account receivable remains outstanding, the lesser are the opportunities of that is collection. The classification of accounts receivable into various age groups is typically known together aging of accounts receivable.

Under aging methodof estimatingallowance for skeptical accounts, a percentage of accounts receivable in each period group is taken into consideration to it is in uncollectible. This portion is usually different for each age group and is estimatedon the basis of past experience and current economic conditions of the locations wherecompany conducts that operations. The estimated uncollectible percentage of each period group is applied to the complete dollar quantity of accounts receivable in that team to obtainan estimated uncollectible quantity of the group. The approximated uncollectible amountsfor all period groups are individually calculated and added together to find the full or overallestimated uncollectible amount. This total or as whole estimated uncollectible amountrepresents the required balance in pin money for cynical accountsaccount in ~ the end of the period.

The aging method explained above is popular among companies where many of the items are offered on credit. The following instance will hopefully make the totality procedure an ext understandable.

Example:

The Fast company has divided its accounts receivable right into five period groups by preparing the complying with aging schedule:

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On the communication of past experience and current economic conditions, the agency has established the percentage of intended credit losses in each age group as follows:

Not however due: 1%1 – 30 days past due: 3%31 – 60 days past due: 10%61 – 90 days previous due: 20%Over 90 days previous due: 50%

At the finish of the year 2021, the allowance for cynical accounts account mirrors a credit transaction balance the $2,000.

Required:

Compute the complete amount of approximated uncollectibles (the compelled balance in the allowance for unconvinced accounts account) on the basis of above information.

Solution:

(1). Computation of required balance in the allowance for cynical accounts account:
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(2). Adjusting entry in ~ the end of the period:

According to above calculations, the full estimated uncollectible amountat the finish of the yearis $2,840 which represents the forced balance in allowance for doubtful accounts account in ~ the finish of the period. Because the company already has actually a credit balance of $2,000 in its allowance for hesitant accounts account, the year-end adjusting entry will be made for the quantity of just $840 ($2,840 – $2,000).

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The adjusting entry is provided below:

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With this entry, the balance in allowance for doubtful accounts account will certainly increase type $2,000 to required balance the $2,840.