Tuesday, April 12, 2011

Aging of receivables method

What is the Aging of Receivables Method?

Big companies will use an aging of customers’ accounts receivable method. In this receivables aging report, each customer balance is classified by how long it is past due. Based on this aging, experience is used to estimate the percent of each aging total that will likely be uncollected

Older past due receivables will be more likely uncollectible because as time goes on, statistics show that people will be less likely to pay.  Once the total uncollectible amount is estimated, an adjusting entry is made to increase the Allowance for Doubtful Accounts so that its balance equals the uncollectible estimate calculated by using the aging of receivables report.

Aging of Receivables Example:

A company estimates its uncollectible accounts receivable to be \$7,000. The current balance in the Allowance for Doubtful Accounts is \$2,000 (credit). An adjusting entry of \$5,000 (\$7,000 desired less \$2,000 balance before adjustment) would be recorded as follows.