In short
An aging schedule groups accounts receivable by how long they have been outstanding and applies a higher expected loss rate to older groups. The total is the required ending balance of the allowance for credit losses.
Key takeaways
- Bad debt expense is the amount needed to bring the allowance to that required balance.
- Under the expected credit loss model, the rates are adjusted for current conditions and reasonable forecasts.
- It is a balance sheet approach, unlike a percentage-of-sales estimate.
Example
A required allowance of $18,000 when the account already has a $5,000 credit balance gives bad debt expense of $13,000.
Where it's tested
FAR: Cash, Receivables & Bad Debts — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Which item is properly included in cash and cash equivalents?