Determining the Rate of Estimated Doubtful Accounts Based on Historical Trends
The company may opt to base their estimate on historical data by reviewing their own trend of uncollected accounts during the past years. The rate is determined by computing the percentage of the actual uncollected receivables for the past two years (as example), over the base, which may be the total credit sales for the year or the year-end balance of the accounts receivable.
To illustrate, supposing the actual uncollected accounts for 2007 was $1,600 and $2,450 for 2008, while the account receivables balances for the two year-ends are as follows: 2007- $12,800 and 2008- $16,400. To arrive at the estimated valuation reserve for the Allowance for Doubtful Accounts, examples and explanations are as follows:
Actual Rates of Uncollected Accounts Receivable:
2007= $1,600/ $12,800 x 100% = 12.5%
2008 = $2,450 / $16,400 x 100% = 14.94%
Average Annual Rate of Uncollected Accounts Receivable Based on Historical Figures:
Ave. Rate = (12.5% + 14.54%) / 2 years
Ave. Rate = 27.08% / 2 years
Ave. Rate = 13.54%
To compute for the current year’s Allowance for Doubtful Accounts, we will use this rate and the accounts receivable year-end balance in our previous example, $15,000. We will arrive at the amount of $2,031 as our valuation reserve for the year via the equation: $15,000 x 13.54%.