How to use the bad debt allowance calculator
- List your receivables by age under Receivables by age: a group name such as "Not yet due", the balance in that group and the expected uncollectible percent. Two example groups are filled in.
- Use Add an age group to include other buckets, such as 31 to 60 days late. Up to 8 groups fit.
- Enter the allowance balance now, the credit balance already in your allowance account. Use a negative number if the account has a debit balance.
- Read the allowance needed, the adjustment to record, the net receivables and the adjusting entry in words. Use Copy, Print or CSV to keep it.
Formula
Allowance for a group = balance x expected uncollectible percent / 100
Allowance needed = sum of the groups
Adjustment = allowance needed - allowance balance now
Net receivables = receivables total - allowance needed
This is the aging method: older groups get higher percents because the older an invoice is, the less likely it is to be paid. The percents come from your own history.
Two groups of receivables
Suppose $10,000 of receivables are not yet due and you expect 5% of them to go bad, and $5,000 are 1 to 30 days late with 20% expected to go bad. The allowance for the first group is $500 and for the second is $1,000, so the allowance needed is $1,500, which is 10% of $15,000.
If the allowance account currently has a credit balance of $400, the adjustment is $1,100: debit Bad Debt Expense $1,100 and credit Allowance for Doubtful Accounts $1,100. With no existing balance the entry is for the full $1,500. Net receivables, which is what you expect to collect, are $15,000 - $1,500 = $13,500.
Why a business sets up an allowance
When you sell on credit, some customers will not pay. Accounting under the accrual method records the expected loss in the same period as the sale instead of waiting until a specific invoice is written off. The allowance is a balance that reduces receivables to the amount you expect to collect, and bad debt expense is the matching cost.
The aging method looks at how long invoices have been outstanding. Younger invoices are more likely to be paid, so they get lower percents. The percentages are estimates, and the best source is your own history of how often invoices of each age were never collected.
Adjusting the entry each period
The allowance carries from one period to the next, so each period you only record the difference between the balance you need and the balance you have. If customers paid better than expected, the allowance may be too high and the entry reverses part of it. The calculator shows the entry in words in both cases.
To write the entry in a proper format, use the journal entry generator. To see how long customers take to pay, use the days sales outstanding calculator, and the working capital calculator shows what the allowance does to your picture of liquidity.
Assumptions and limits
- Percentages are estimates you provide. The starting 5% and 20% are examples and are not rates for any business or industry.
- Only the aging method is covered. The percent of sales method and individual account review are different approaches.
- How bad debts are recorded and deducted for tax depends on your accounting rules and local tax rules, which are not modeled.
- The adjusting entry shown is a description in words and is not accounting advice.
Frequently asked questions
How do you calculate allowance for doubtful accounts?
Group receivables by age, multiply each group by the share you expect not to collect, and add the results. The sum is the allowance you need.
What is the difference between allowance and bad debt expense?
The allowance is a balance sheet account that reduces receivables. Bad debt expense is the cost shown on the income statement when you increase the allowance.
What if the allowance already has a balance?
Only the difference needs an entry. Enter the current balance and the tool shows the adjustment, which can be positive or, if the old balance was too high, negative.
Where do the percentages come from?
From your own records of how many invoices in each age group were never paid, or from a careful judgment if you do not have history yet. The calculator does not provide rates.