Alright. Now let's use the aging of receivables method for the allowance for doubtful accounts. This method is different from the percentage of sales method. In this method, we estimate the amount of uncollectible accounts in the ending balance of Accounts Receivable (AR) based on age, okay? So, instead of looking at the amount of sales, we're going to look at how much is owed to us. Alright? So, it's a little different; this one is called a balance sheet approach because we're going to be looking at a balance sheet account, accounts receivable, whereas the income statement approach for the percentage of sales, we're looking at revenue. Okay? An exam question will typically give you some sort of aging schedule, which we'll see an example below, and we're going to use this to calculate the ending balance in the allowance. Okay. The ending balance in the allowance for doubtful accounts. Notably, they don't always give you an aging schedule. Sometimes you'll have an easier exam question that just tells you the results of the aging schedule, okay? So, instead of actually doing the work of the aging schedule, they'll just say this is the ending balance in the allowance. They'll tell you the ending balance in the allowance.
Notice that we can again use our base formula just like we did with the percentage of sales method. However, it's a little different this time. We still have our same formula: beginning balance in the allowance plus bad debt expense minus accounts written off equals ending balance, and like I said, you probably won't deal with this in the questions. They usually leave that out, but it's good to know that it's there. So what's left is our beginning balance, which is generally given, and then the ending balance comes from the aging schedule and this is usually given. It's either 0 or they'll tell you the amount, and then finally bad debt expense. So, we have to solve for bad debt expense in this situation, okay?
Let's go ahead and do an example and let's see how this all works. A company has gross accounts receivable totaling $100,000. The company estimates the allowance for doubtful accounts based on the following table. If the allowance for doubtful accounts has a credit balance of $1,000, they have to give you this information in these questions. You have to know the beginning balance because we have to plug in to get the bad debt expense. So this is the beginning balance. If the allowance has a credit balance of $1,000, what is the entry to record this year's bad debt? Alright. So notice what they give us. They give us an age and they tell us the amounts that are within that age group. Notice these amounts show the breakdown of the $100,000 in accounts receivable by age. Okay? Based on the age, there's a percentage that's uncollectible. So, the person sets up this schedule, where the $100,000, that's all the money that's owed to us right now. What we're finding is what percentage of that is uncollectible. Well, that's the ending balance in the allowance because the ending balance in the allowance should be the amount that's uncollectible.
Let's check it out. What we're going to do is, we're going to multiply across based on the amount times the percentage uncollectible. The current ones, the ones from 1 to 30 days, notice there's a small chance they're uncollectible. $45,000 times 1%, which comes out to $450. Let's do the next one. Notice as they get older, the percentage uncollectible gets bigger. $25,000 times 3% comes out to $750; this is just multiplying across, $25,000 times 3%. Let's keep going. $20,000 times 5% for these older ones results in $1,000 being uncollectible. Finally, the very old ones, $10,000 times 20% uncollectible, that comes out to $2,000. So we add all of these up and that will be the ending balance in the allowance: $2,000 plus $1,000 plus $750 plus $450 equals $4,200.
Now, knowing that, let's set up our T-account and find out what our bad debt expense is going to be. So, we've got our Allowance for Doubtful Accounts, and it started with a beginning balance, right? They told us it has a beginning balance of a $1,000 credit balance. So that's our beginning balance right there as a credit, and then there will be some bad debt expense. There will be some bad debt expense that increases this account. There are no write-offs; they didn't talk about it in this question at all. So there are no write-offs — and finally, that gets us to our ending balance. We're going to have our ending balance down here which we calculated as $4,200. So what we need to do is we need to find a number that's going to get us from the beginning balance of $1,000 to the $4,200. So we could just set it up. We would do our $1,000 plus the bad debt expense, right, minus 0 equals the ending balance of $4,200. Well, we just subtract $1,000 from both sides, right? And it'll tell us that our bad debt expense equals $3,200.
So just to reiterate, so you can see, I'm going to make the journal entry over here. The journal entry, easy enough, right? We found out what our bad debt expense is going to be, the $3,200. So that canceled with that, right? We saw our journal entry for $3,200. This is the key here. This is the key to the journal entry, finding what the bad debt expense is going to be, and then we do our journal entry for Bad Debt Expense for $3,200 and Allowance for Doubtful Accounts for $3,200. Notice that that entry, it brings us up to the ending balance of $4,200 that we had previously calculated. Cool? So it's kind of roundabout, but you can see that the steps are not too complicated. Let's go ahead and move on to the next video. You guys can try a practice.
