Methods of Estimating Amount of Debt The amount of bad debt expense to record in any accounting period is based on past experience and current credit policies. Two methods may be used to estimate the amount of bad debt expense: (1) the percentage of sales method and (2) the percentage of accounts receivable method. The percentage of sales method is based on the assumption that an identifiable relationship exists between the amount of credit sales in an accounting period and the amount of bad debts incurred in that same period. For example, assume that the Alford Company has recorded the following amounts of sales and losses from uncollectible accounts during the past three years: This analysis indicates that uncollectible accounts have averaged 1 percent of sales during the past three years ($2,269/$226,900). During 1993 credit sales amounted to $96,800, and management believes that uncollectible accounts will continue to average 1 percent of credit sales. Therefore, $968 ($96,800 × 0.01) is the estimated bad debt expense for 1993, and the adjusting general journal entry to record the 1993 bad debt expense by the percentage of sales method is: The percentage of accounts receivable method assumes that an identifiable relationship exists between the magnitude of accounts receivable and bad debt expense. Additionally, a relationship may exist between the length of time an account receivable has been outstanding and bad debts. That is, the longer an account receivable has been outstanding, the less likely it is to be collected. If this relationship is found to exist, the individual accounts receivable are classified by their age and an estimate of bad debts is made for each age category. Analyzing the accounts receivable by their age is termed the aging the accounts receivable method. For example, assume that the Alford Company's analysis of past records resulted in the following estimates of the percentages of accounts that will become uncollectible: An aging of the Alford Company's accounts receivable balance on December 31, 1993, revealed the following information: This analysis indicates that a total of $945 will not be collected from existing accounts receivable. This total is the amount that should appear as Allowance for Uncollectible Accounts on Alford Company's December 31, 1993, balance sheet. Therefore, it is necessary to consider any existing balance in the Allowance for Uncollectible Accounts to determine the amount of the adjustment necessary. Assume that Alford's Allowance for Uncollectible Accounts had a $65 credit balance prior to recording any adjusting entry. The amount of the required adjustment for bad debt expense is calculated in the following manner: The adjusting general journal entry necessary to record bad debt expense by the percentage of accounts receivable method is: The Allowance for Uncollectible Accounts may have a debit balance at the end of an accounting period prior to recording the adjustment for estimated bad debts. A debit balance in the account occurs if the actual amount of uncollectible accounts receivable written off during the year exceeds the estimated amount from the previous year.