{"id":170,"date":"2024-09-06T16:47:07","date_gmt":"2024-09-06T16:47:07","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/estimating-uncollectible-accounts\/"},"modified":"2024-09-13T23:48:59","modified_gmt":"2024-09-13T23:48:59","slug":"estimating-uncollectible-accounts","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/estimating-uncollectible-accounts\/","title":{"raw":"Estimating Uncollectible Accounts","rendered":"Estimating Uncollectible Accounts"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Compute and journalize bad debt expense as a percentage of receivables (balance sheet method)<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nThe percentage-of-receivables method estimates uncollectible accounts by determining the estimated net realizable value of accounts receivable, so many accountants refer to this as the balance-sheet method.\r\n\r\nThere are two ways to do this method: a simple way that, of course, is not the best practice and a more complicated but more reliable way that uses an aging analysis that we\u2019ll cover in the next section.\r\n\r\nHere is Larkin Co.\u2019s subsidiary ledger from year one before any adjustment for bad debt:\r\n<table class=\"fin-table acctstatement\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Customer<\/th>\r\n<th scope=\"col\">Amount Owed<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>A<\/td>\r\n<td>57,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>B<\/td>\r\n<td>22,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>C<\/td>\r\n<td>74,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>D<\/td>\r\n<td>8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>E<\/td>\r\n<td>12,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>F<\/td>\r\n<td>25,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>G<\/td>\r\n<td>50,500<span class=\"u-sr-only\">Single line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>250,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf Larkin estimates 3% of ending accounts receivable will be uncollectible, or conversely, estimates 97% of accounts receivable are collectible, then the allowance for doubtful accounts should be $7,500, calculated as follows:\r\n\r\nAccounts Receivable, gross \u00d7 estimated uncollectible = allowance\r\n\r\nOr\r\n\r\nAccounts Receivable, gross \u00d7 estimated collectible = net realizable value\r\n<div align=\"left\">\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$250,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">X % uncollectible<\/th>\r\n<td>3.0%<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Allowance<\/th>\r\n<td>$7,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$250,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">X % collectible<\/th>\r\n<td>97.0%<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net realizable value<\/th>\r\n<td>$242,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$250,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Allowance<\/th>\r\n<td>(7,500)<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net realizable value<\/th>\r\n<td>$242,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nLet\u2019s look at Larkin Co. again. Remember they billed out $1 million in services during the year (a) and collected $750 thousand of that (b):\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10201326\/Screen-Shot-2020-11-10-at-12.04.03-PM.png\"><img class=\"alignnone wp-image-5465\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10201326\/Screen-Shot-2020-11-10-at-12.04.03-PM-300x270.png\" alt=\"A T checking account. On the debit side, there is an entry for 750,000 dollars labeled (b).\" width=\"269\" height=\"242\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10203558\/Screen-Shot-2020-11-10-at-12.05.14-PM.png\"><img class=\"alignnone wp-image-5466\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10203558\/Screen-Shot-2020-11-10-at-12.05.14-PM-300x116.png\" alt=\"Two T accounts side by side. On the left is the Accounts Receivable. There is a debit entry labeled (a) of 1,000,000 dollars. On the credit side, there is an entry for 750,000 dollars labeled (b). There is a total debit balance of 250,000 dollars. On the right side is the Allowance for Doubtful Accounts, which has no entries.\" width=\"543\" height=\"210\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10205413\/Screen-Shot-2020-11-10-at-12.05.19-PM.png\"><img class=\"alignnone wp-image-5467\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10205413\/Screen-Shot-2020-11-10-at-12.05.19-PM-300x138.png\" alt=\"Two T accounts next to each other. On the left is Service Revenue. There is a credit entry of 1,000,000 labeled (a). On the right is Bad Debt Expense, which has no entries.\" width=\"567\" height=\"261\" \/><\/a>\r\n\r\n<span style=\"font-size: 1rem; text-align: initial;\">Now we have to book the allowance for doubtful accounts. Note: we did not calculate bad debt expense. We calculated the uncollectible accounts based on the accounts receivable we had outstanding at the end of the year.<\/span>\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>Bad Debt Expense<\/td>\r\n<td><\/td>\r\n<td class=\"r\">7,500.00<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">7,500.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To record bad debts as a percentage of accounts receivable<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice, other than the amount and description, this is the same entry we made under the percentage of sales method.\r\n\r\nHowever, there is a significant difference (other than the amount).\r\n\r\nLet\u2019s look at year two. Sales of $1,250,000 (d) and collections of $800,000 (e) and the write off of $8,000 (f).\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10210220\/Screen-Shot-2020-11-10-at-12.05.33-PM.png\"><img class=\"alignnone wp-image-5468\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10210220\/Screen-Shot-2020-11-10-at-12.05.33-PM-300x125.png\" alt=\"Two T accounts side by side. On the left is a checking account. At the top of it, there is a debit balance of 750,000 dollars. There is also a debit entry of 800,000 dollars labeled (e). There is a total debit balance of 1,550,000 dollars. On the right is another checking account. There is a credit balance of 892,500 dollars.\" width=\"578\" height=\"241\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10211143\/Screen-Shot-2020-11-10-at-12.05.38-PM.png\"><img class=\"alignnone wp-image-5469\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10211143\/Screen-Shot-2020-11-10-at-12.05.38-PM-300x134.png\" alt=\"Two T accounts side by side. On the left is the Accounts Receivable, with a balance at the top of 250,000 dollars. There is also a debit entry of 1,250,000 dollars labeled (d). There is a credit entry of 800,000 dollars labeled (e) and another credit entry for 8,000 dollars labeled (f). There is a total debit balance of 692,000 dollars. On the right side is Allowance for Doubtful Accounts, which has a credit balance at the top of 7,500 dollars. There is also a debit entry for 8,000 dollars. There is a total debit balance of 500 dollars.\" width=\"582\" height=\"260\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10212900\/Screen-Shot-2020-11-10-at-12.05.43-PM.png\"><img class=\"alignnone wp-image-5470\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10212900\/Screen-Shot-2020-11-10-at-12.05.43-PM-300x139.png\" alt=\"Two T accounts next to each other. On the left is Service Revenue, which has a credit entry of 1,250,000 dollars that is labeled (d). On the right is Bad Debt Expenses, which has no entries.\" width=\"587\" height=\"272\" \/><\/a>\r\n\r\n<span style=\"font-size: 1rem; text-align: initial;\">Now it\u2019s time to calculate the allowance for doubtful accounts:<\/span>\r\n<div align=\"left\">\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$692,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">% uncollectible<\/th>\r\n<td>3.0%<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Allowance<\/th>\r\n<td>$20,760<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$692,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">% collectible<\/th>\r\n<td>97.0%<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net realizable value<\/th>\r\n<td>$671,240<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Accounts Receivable, gross<\/th>\r\n<td>$692,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Allowance<\/th>\r\n<td>(20,760)<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net realizable value<\/th>\r\n<td>$671,240<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n(Quick: Get out your calculator and check the math.)\r\n\r\nThe allowance for doubtful accounts, based on the percentage of sales, should be a credit balance of $20,760. Right now, it has a debit balance of $500 because last year we booked $7,500 but the actual write off was $8,000. Go back and look at the T account for the allowance.\r\n\r\nWhat entry would you have to make to the allowance account to get the balance to be $20,760?\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213038\/Screen-Shot-2020-11-10-at-12.05.51-PM.png\"><img class=\"alignnone size-medium wp-image-5471\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213038\/Screen-Shot-2020-11-10-at-12.05.51-PM-300x243.png\" alt=\"A T account for Allowance for Doubtful Accounts. At the top is a credit balance of 7,500 dollars. There is a debit entry of 8,000 dollars, as well as a credit adjusting journal entry of 21,260 dollars. The total credit balance is 20,760 dollars.\" width=\"300\" height=\"243\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213230\/Screen-Shot-2020-11-10-at-12.05.55-PM.png\"><img class=\"alignnone size-medium wp-image-5472\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213230\/Screen-Shot-2020-11-10-at-12.05.55-PM-300x238.png\" alt=\"A T accounts for Bad Debt Expense. On the debit side, it has an adjusting journal entry of 21,260 dollars.\" width=\"300\" height=\"238\" \/><\/a>\r\n\r\nNotice that bad debt expense in this case is simply the other half of the entry to get the balance sheet account adjusted. The focus in this case is on the net realizable value of the receivables, and the income statement (bad debt expense) is relegated to second place.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>Bad Debt Expense<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">21,260.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">21,260.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To record bad debts as a percentage of receivables<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThis whole process is worth a review if you don\u2019t have a clear understanding of it yet. Walk through it step-by-step:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\">Calculate the balance you need to have in the account (allowance for doubtful accounts).<\/li>\r\n \t<li style=\"font-weight: 400;\">Examine the current account balance.<\/li>\r\n \t<li style=\"font-weight: 400;\">Determine what entry, debit or credit, and amount you need to have in order to get the balance where it needs to be.<\/li>\r\n \t<li style=\"font-weight: 400;\">Test your hypothesis using T accounts.<\/li>\r\n \t<li style=\"font-weight: 400;\">Write the entry, post it, and make sure it did what you wanted it to do.<\/li>\r\n<\/ol>\r\nThis process works for all kinds of transaction analysis. For instance, let\u2019s say you wrote off an account earlier in the year, but then the company paid unexpectedly. This doesn\u2019t happen very often, but it\u2019s possible.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec 31<\/th>\r\n<td>Allowance for Doubtful Accounts<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">2,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">2,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\r\n<td>To write off bad account<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAnd then, surprise, the company pays you $1,500 a few months later. You know you have to debit cash, but to what account do you post the credit?\r\n\r\nYou could just post the credit to allowance for doubtful accounts, but the proper way to handle this is to re-establish the receivable by reversing the write-off (partially) and then recording the payment against the account.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Mar 17<\/th>\r\n<td>Accounts Receivable<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,500.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\r\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,500.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\r\n<td>To reverse prior write-off (partial)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Mar 17<\/th>\r\n<td>Checking Account<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,500.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\r\n<td>\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,500.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\r\n<td>To record payment on account<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nHopefully, your accounting software has a process in place to accomplish this transaction, but it\u2019s rare enough that you may have to figure out the result you want and then make it happen using the built-in systems.\r\n\r\nNext, we\u2019ll look at a more sophisticated way to calculate the net realizable value of accounts receivable and the allowance for doubtful accounts, but first check your understanding of the percentage of receivables method.\r\n\r\n&nbsp;\r\n\r\n<section class=\"textbox watchIt\" aria-label=\"Watch It\"><iframe src=\"\/\/plugin.3playmedia.com\/show?mf=5475492&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=mBuprTmisPw&amp;video_target=tpm-plugin-25r4r0ia-mBuprTmisPw\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\" data-mce-fragment=\"1\"><\/iframe>You can view the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Transcripts\/PercentageOfReceivablesMethod_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Percentage of Receivables Method for Bad Debts Expense (Financial Accounting Tutorial #44)\" here (opens in new window)<\/a>.<\/section><section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25308[\/ohm2_question]\r\n[ohm_question]204387-204388-204400[\/ohm_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Compute and journalize bad debt expense as a percentage of receivables (balance sheet method)<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>The percentage-of-receivables method estimates uncollectible accounts by determining the estimated net realizable value of accounts receivable, so many accountants refer to this as the balance-sheet method.<\/p>\n<p>There are two ways to do this method: a simple way that, of course, is not the best practice and a more complicated but more reliable way that uses an aging analysis that we\u2019ll cover in the next section.<\/p>\n<p>Here is Larkin Co.\u2019s subsidiary ledger from year one before any adjustment for bad debt:<\/p>\n<table class=\"fin-table acctstatement\">\n<tbody>\n<tr>\n<th scope=\"col\">Customer<\/th>\n<th scope=\"col\">Amount Owed<\/th>\n<\/tr>\n<tr>\n<td>A<\/td>\n<td>57,500<\/td>\n<\/tr>\n<tr>\n<td>B<\/td>\n<td>22,000<\/td>\n<\/tr>\n<tr>\n<td>C<\/td>\n<td>74,500<\/td>\n<\/tr>\n<tr>\n<td>D<\/td>\n<td>8,000<\/td>\n<\/tr>\n<tr>\n<td>E<\/td>\n<td>12,500<\/td>\n<\/tr>\n<tr>\n<td>F<\/td>\n<td>25,000<\/td>\n<\/tr>\n<tr>\n<td>G<\/td>\n<td>50,500<span class=\"u-sr-only\">Single line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>250,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>If Larkin estimates 3% of ending accounts receivable will be uncollectible, or conversely, estimates 97% of accounts receivable are collectible, then the allowance for doubtful accounts should be $7,500, calculated as follows:<\/p>\n<p>Accounts Receivable, gross \u00d7 estimated uncollectible = allowance<\/p>\n<p>Or<\/p>\n<p>Accounts Receivable, gross \u00d7 estimated collectible = net realizable value<\/p>\n<div style=\"text-align: left;\">\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$250,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">X % uncollectible<\/th>\n<td>3.0%<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Allowance<\/th>\n<td>$7,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$250,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">X % collectible<\/th>\n<td>97.0%<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net realizable value<\/th>\n<td>$242,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$250,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Allowance<\/th>\n<td>(7,500)<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net realizable value<\/th>\n<td>$242,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Let\u2019s look at Larkin Co. again. Remember they billed out $1 million in services during the year (a) and collected $750 thousand of that (b):<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10201326\/Screen-Shot-2020-11-10-at-12.04.03-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5465\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10201326\/Screen-Shot-2020-11-10-at-12.04.03-PM-300x270.png\" alt=\"A T checking account. On the debit side, there is an entry for 750,000 dollars labeled (b).\" width=\"269\" height=\"242\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10203558\/Screen-Shot-2020-11-10-at-12.05.14-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5466\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10203558\/Screen-Shot-2020-11-10-at-12.05.14-PM-300x116.png\" alt=\"Two T accounts side by side. On the left is the Accounts Receivable. There is a debit entry labeled (a) of 1,000,000 dollars. On the credit side, there is an entry for 750,000 dollars labeled (b). There is a total debit balance of 250,000 dollars. On the right side is the Allowance for Doubtful Accounts, which has no entries.\" width=\"543\" height=\"210\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10205413\/Screen-Shot-2020-11-10-at-12.05.19-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5467\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10205413\/Screen-Shot-2020-11-10-at-12.05.19-PM-300x138.png\" alt=\"Two T accounts next to each other. On the left is Service Revenue. There is a credit entry of 1,000,000 labeled (a). On the right is Bad Debt Expense, which has no entries.\" width=\"567\" height=\"261\" \/><\/a><\/p>\n<p><span style=\"font-size: 1rem; text-align: initial;\">Now we have to book the allowance for doubtful accounts. Note: we did not calculate bad debt expense. We calculated the uncollectible accounts based on the accounts receivable we had outstanding at the end of the year.<\/span><\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>Bad Debt Expense<\/td>\n<td><\/td>\n<td class=\"r\">7,500.00<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">7,500.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To record bad debts as a percentage of accounts receivable<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice, other than the amount and description, this is the same entry we made under the percentage of sales method.<\/p>\n<p>However, there is a significant difference (other than the amount).<\/p>\n<p>Let\u2019s look at year two. Sales of $1,250,000 (d) and collections of $800,000 (e) and the write off of $8,000 (f).<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10210220\/Screen-Shot-2020-11-10-at-12.05.33-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5468\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10210220\/Screen-Shot-2020-11-10-at-12.05.33-PM-300x125.png\" alt=\"Two T accounts side by side. On the left is a checking account. At the top of it, there is a debit balance of 750,000 dollars. There is also a debit entry of 800,000 dollars labeled (e). There is a total debit balance of 1,550,000 dollars. On the right is another checking account. There is a credit balance of 892,500 dollars.\" width=\"578\" height=\"241\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10211143\/Screen-Shot-2020-11-10-at-12.05.38-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5469\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10211143\/Screen-Shot-2020-11-10-at-12.05.38-PM-300x134.png\" alt=\"Two T accounts side by side. On the left is the Accounts Receivable, with a balance at the top of 250,000 dollars. There is also a debit entry of 1,250,000 dollars labeled (d). There is a credit entry of 800,000 dollars labeled (e) and another credit entry for 8,000 dollars labeled (f). There is a total debit balance of 692,000 dollars. On the right side is Allowance for Doubtful Accounts, which has a credit balance at the top of 7,500 dollars. There is also a debit entry for 8,000 dollars. There is a total debit balance of 500 dollars.\" width=\"582\" height=\"260\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10212900\/Screen-Shot-2020-11-10-at-12.05.43-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5470\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10212900\/Screen-Shot-2020-11-10-at-12.05.43-PM-300x139.png\" alt=\"Two T accounts next to each other. On the left is Service Revenue, which has a credit entry of 1,250,000 dollars that is labeled (d). On the right is Bad Debt Expenses, which has no entries.\" width=\"587\" height=\"272\" \/><\/a><\/p>\n<p><span style=\"font-size: 1rem; text-align: initial;\">Now it\u2019s time to calculate the allowance for doubtful accounts:<\/span><\/p>\n<div style=\"text-align: left;\">\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$692,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">% uncollectible<\/th>\n<td>3.0%<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Allowance<\/th>\n<td>$20,760<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$692,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">% collectible<\/th>\n<td>97.0%<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net realizable value<\/th>\n<td>$671,240<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table>\n<tbody>\n<tr>\n<th scope=\"row\">Accounts Receivable, gross<\/th>\n<td>$692,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Allowance<\/th>\n<td>(20,760)<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net realizable value<\/th>\n<td>$671,240<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>(Quick: Get out your calculator and check the math.)<\/p>\n<p>The allowance for doubtful accounts, based on the percentage of sales, should be a credit balance of $20,760. Right now, it has a debit balance of $500 because last year we booked $7,500 but the actual write off was $8,000. Go back and look at the T account for the allowance.<\/p>\n<p>What entry would you have to make to the allowance account to get the balance to be $20,760?<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213038\/Screen-Shot-2020-11-10-at-12.05.51-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-5471\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213038\/Screen-Shot-2020-11-10-at-12.05.51-PM-300x243.png\" alt=\"A T account for Allowance for Doubtful Accounts. At the top is a credit balance of 7,500 dollars. There is a debit entry of 8,000 dollars, as well as a credit adjusting journal entry of 21,260 dollars. The total credit balance is 20,760 dollars.\" width=\"300\" height=\"243\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213230\/Screen-Shot-2020-11-10-at-12.05.55-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-5472\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/10213230\/Screen-Shot-2020-11-10-at-12.05.55-PM-300x238.png\" alt=\"A T accounts for Bad Debt Expense. On the debit side, it has an adjusting journal entry of 21,260 dollars.\" width=\"300\" height=\"238\" \/><\/a><\/p>\n<p>Notice that bad debt expense in this case is simply the other half of the entry to get the balance sheet account adjusted. The focus in this case is on the net realizable value of the receivables, and the income statement (bad debt expense) is relegated to second place.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>Bad Debt Expense<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">21,260.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">21,260.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To record bad debts as a percentage of receivables<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>This whole process is worth a review if you don\u2019t have a clear understanding of it yet. Walk through it step-by-step:<\/p>\n<ol>\n<li style=\"font-weight: 400;\">Calculate the balance you need to have in the account (allowance for doubtful accounts).<\/li>\n<li style=\"font-weight: 400;\">Examine the current account balance.<\/li>\n<li style=\"font-weight: 400;\">Determine what entry, debit or credit, and amount you need to have in order to get the balance where it needs to be.<\/li>\n<li style=\"font-weight: 400;\">Test your hypothesis using T accounts.<\/li>\n<li style=\"font-weight: 400;\">Write the entry, post it, and make sure it did what you wanted it to do.<\/li>\n<\/ol>\n<p>This process works for all kinds of transaction analysis. For instance, let\u2019s say you wrote off an account earlier in the year, but then the company paid unexpectedly. This doesn\u2019t happen very often, but it\u2019s possible.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec 31<\/th>\n<td>Allowance for Doubtful Accounts<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">2,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">2,000.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec 31<\/span><\/th>\n<td>To write off bad account<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>And then, surprise, the company pays you $1,500 a few months later. You know you have to debit cash, but to what account do you post the credit?<\/p>\n<p>You could just post the credit to allowance for doubtful accounts, but the proper way to handle this is to re-establish the receivable by reversing the write-off (partially) and then recording the payment against the account.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Mar 17<\/th>\n<td>Accounts Receivable<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,500.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\n<td>\u00a0 \u00a0 \u00a0 Allowance for Doubtful Accounts<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,500.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\n<td>To reverse prior write-off (partial)<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 1<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Mar 17<\/th>\n<td>Checking Account<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,500.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\n<td>\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,500.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Mar 17<\/span><\/th>\n<td>To record payment on account<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Hopefully, your accounting software has a process in place to accomplish this transaction, but it\u2019s rare enough that you may have to figure out the result you want and then make it happen using the built-in systems.<\/p>\n<p>Next, we\u2019ll look at a more sophisticated way to calculate the net realizable value of accounts receivable and the allowance for doubtful accounts, but first check your understanding of the percentage of receivables method.<\/p>\n<p>&nbsp;<\/p>\n<section class=\"textbox watchIt\" aria-label=\"Watch It\"><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=5475492&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=mBuprTmisPw&amp;video_target=tpm-plugin-25r4r0ia-mBuprTmisPw\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\" data-mce-fragment=\"1\"><\/iframe>You can view the <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Financial+Accounting\/Transcripts\/PercentageOfReceivablesMethod_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Percentage of Receivables Method for Bad Debts Expense (Financial Accounting Tutorial #44)&#8221; 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