Aging of Accounts Method
The aging of accounts method is similar to the percentage of accounts receivable method. The only difference is it looks at how long it takes customers to pay. A general rule is the longer an accounts receivable remains unpaid, it will default. To start, you will need to have an aging of accounts receivable report. Accounting software can generate this report for you. Once you have this report, you can download a Google sheet https://docs.google.com/spreadsheets/d/1iZYly937xH7zmmc9CLCnt7BcBT5nd3z7jjC-SYQ6hKY/edit?usp=sharing I made to help you estimate your bad debts. You need to enter your totals for each column and it will estimate the amounts. I filled out the worksheet with my data, which estimated $11. This means for example, if I sold $1,000 of products on credit, $11 of that total might become bad debt. Use the estimated amount that's generated so you can use it in your contra-asset account when calculating bad debt.
Percentage of Accounts Receivable Method
The percentage of accounts receivable method looks at the balance of accounts receivable and the total bad debts at the end of the year. You divide the totals and it will calculate an average you can use to estimate future bad debts. This method is similar to the percentage of sales method but uses the balance sheet totals instead of income statement amounts. This method is usually a little easier to do. Download this Google sheet https://docs.google.com/spreadsheets/d/16Ti5KFj93MclMvXg0eEAip0gj1529MLAhoLHymKykjA/edit?usp=sharing and just input your accounts receivable balance for each year ending on December 31st. Then also add the balance of uncollected receivables for each year ending on December 31st. Once your data is entered, it will divide the totals and calculate an average you can use to estimate your bad debts in a contra-asset account.
Percentage of Sales Method
To use the percentage of sales method, you will need to know your credit sales. Credit sales are the sales you made on credit, not in cash. You can find this on an income statement. If you can’t find your credit sales on your income statement, you can calculate it by using the formula below. Credit Sales = Total Sales - Cash Sales For example, let’s say your business generated $50,000 worth of sales and $25,000 of that was cash sales. Credit sales in this case would be $25,000. You should calculate your credit sales for at least 3 to 5 years. You need to figure out how many sales were uncollectible for each year. Once you have this information, download this Google sheet https://docs.google.com/spreadsheets/d/1boop4i8mnD9kDkJnjIPzDXN9XhJRCr7PzKta3GTOUTY/edit?usp=sharing and plug-in all your data. This will calculate your total uncollected credit sales and its percentage.