Bad Debt Expense Calculator — Allowance for Doubtful Accounts
Estimate bad debt expense and the allowance for doubtful accounts with the aging-of-receivables method or the percentage-of-credit-sales method, plus the adjusting entry and net realizable value.
How it works
Aging method: required allowance = Σ (balance in each age group × its uncollectible %); bad debt expense = required allowance − allowance balance before adjustment · Sales method: bad debt expense = credit sales × uncollectible %; ending allowance = beginning balance + expense · Net realizable value = receivables − allowance
Under accrual accounting (GAAP and IFRS), a business estimates the receivables it will not collect and records the expense in the same period as the sales, using a contra-asset account called the allowance for doubtful accounts. The aging method looks at the balance sheet: older invoices are less likely to be paid, so each age group gets a higher loss rate, and the expense is whatever brings the allowance to that target. The percentage-of-sales method looks at the income statement and simply books a fixed share of credit sales each period. Base the percentages on your own collection history.
Worked example
Receivables of $103,000 are aged as $60,000 not yet due (1%), $25,000 at 1–30 days (3%), $10,000 at 31–60 days (10%), $5,000 at 61–90 days (25%) and $3,000 over 90 days (50%). The required allowance is $600 + $750 + $1,000 + $1,250 + $1,500 = $5,100. With $2,000 already in the allowance, the bad debt expense is $5,100 − $2,000 = $3,100.00, and the net realizable value is $97,900.
Sources: Investopedia — Bad debt expense · Investopedia — Allowance for doubtful accounts
Frequently asked questions
How do you calculate bad debt expense?
With the percentage-of-sales method, multiply credit sales by the share you expect not to collect. With the aging method, estimate the allowance needed from the aged receivables and subtract the balance already in the allowance — the difference is the expense.
What is the allowance for doubtful accounts?
A contra-asset account that reduces accounts receivable to the amount the business expects to collect (net realizable value). Write-offs of specific bad accounts reduce both the allowance and receivables without touching expense.
What if the allowance has a debit balance?
If write-offs during the year exceeded the allowance, it ends with a debit balance. Enter it as a negative number: under the aging method the expense must then cover both the target allowance and the deficit.
Which method is better, aging or percentage of sales?
The aging method gives a more accurate balance sheet because it reflects the actual mix of overdue invoices. The percentage-of-sales method is simpler and matches expense to revenue well. Many companies use sales percentages monthly and an aging review at year-end.
What is the direct write-off method?
It records bad debt only when a specific account is written off. It is simple but does not match expenses with the sales that caused them, so it is generally not allowed under GAAP when bad debts are material (it is used for tax purposes in the US).
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Educational estimate only — not accounting or tax advice. Follow your accounting framework (GAAP, IFRS or local standards) and your accountant’s guidance when you record entries.