Page 375 - Accounting Principles (A Business Perspective)

9. Receivables and payables

ALLEN COMPANY
Accounts Receivable Aging Schedule
2010 December 31
Accounts Days Past Due
Receivable Not Yet
Customer Balance Due
Over
1-30 31-60 61-90 90
X $ 5,000 $ 5,000
Y 14,000 $ 12,000 $2,000
Z 400 $200 200
All others 808,600 $ 560,000 240,000 2,000 600 6,000
$ 828,000 $ 560,000 $252,000 $4,000 $800 $11,200
Percentage estimated 1% 5% 10% 25% 50%
as uncollectible
Estimated amount
uncollectible
$ 24,400 $ 5,600 $ 12,600 $ 400 $200 $ 5,600

Exhibit 77: Accounts receivable aging schedule
As another example, suppose that Rankin had a USD 300 debit balance in the allowance account before
adjustment. Then, a credit of USD 6,300 would be necessary to get the balance to the required USD 6,000 credit

balance. The calculation of the necessary adjustment is [(USD 100,000 X 0.06) + USD 300] = USD 6,300. Using T-
accounts, Rankin would show:
Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Dec. 31 Bal. before Dec. 31
Adjustment 6,300 Adjustment 300 Adjustment 6,300
Bal. after
Adjustment 6,000
No matter what the pre-adjustment allowance account balance is, when using the percentage-of-receivables

method, Rankin adjusts the Allowance for Uncollectible Accounts so that it has a credit balance of USD 6,000—
equal to 6 per cent of its USD 100,000 in Accounts Receivable. The desired USD 6,000 ending credit balance in the
Allowance for Uncollectible Accounts serves as a "target" in making the adjustment.
So far, we have used one uncollectibility rate for all accounts receivable, regardless of their age. However, some
companies use a different percentage for each age category of accounts receivable. When accountants decide to use
a different rate for each age category of receivables, they prepare an aging schedule. An aging schedule classifies
accounts receivable according to how long they have been outstanding and uses a different uncollectibility

percentage rate for each age category. Companies base these percentages on experience. In Exhibit 77, the aging
schedule shows that the older the receivable, the less likely the company is to collect it.
Classifying accounts receivable according to age often gives the company a better basis for estimating the total
amount of uncollectible accounts. For example, based on experience, a company can expect only 1 per cent of the
accounts not yet due (sales made less than 30 days before the end of the accounting period) to be uncollectible. At
the other extreme, a company can expect 50 per cent of all accounts over 90 days past due to be uncollectible. For
each age category, the firm multiplies the accounts receivable by the percentage estimated as uncollectible to find
the estimated amount uncollectible.
The sum of the estimated amounts for all categories yields the total estimated amount uncollectible and is the

desired credit balance (the target) in the Allowance for Uncollectible Accounts.
Since the aging schedule approach is an alternative under the percentage-of-receivables method, the balance in
the allowance account before adjustment affects the year-end adjusting entry amount recorded for uncollectible

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