Comprehensive Analysis of Doubtful Debts Using the Aging Method

This report provides an overview of the aging method for calculating doubtful debts, a crucial technique in accounting used to estimate the amount of money a business does not expect to receive from its customers. The report explains the concept of doubtful debts, emphasizing that they arise when the certainty of receiving payment is uncertain. It details the aging of accounts receivable process, where receivable accounts are classified based on how long debts have been outstanding. The report includes a sample table illustrating the classification of accounts and the calculation of the allowance for doubtful debts. It highlights that the longer the payment duration, the higher the possibility of bad debts. The report also discusses the advantages and disadvantages of the aging method, referencing opinions of management staff, and concludes that the aging method is more accurate and scientific. The report is supported by references to accounting literature and online resources.

Aging Method of Calculating Doubtful Debts 1
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Aging Method of Calculating Doubtful Debts
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Aging Method of Calculating Doubtful Debts
Doubtful debts refer to the total sum of money that a business does not expect to receive from its
customers. It is an operating expense that can be documented in a financial statement when a
customer is facing financial difficulties. Debts are classified to be doubtful when the certainty of
receiving its payment is not definite. Doubtful debts arise in the period following the sales. In
current accounting, there are two methods of estimating doubtful debts (Budhathoki 2018). The
percent of receivables and sales approach and the aging of accounts receivable process.
The accounts receivable aging method estimates doubtful debts through the classification of
receivable accounts of a business basing on the duration for which the debts have been
outstanding, followed by the evaluation of the possibility of not collecting the payment for each
category. This helps with the identification of clients in the business who take longer than the
required period to pay for services so that sales restrictions can be implemented. The aging of
accounts method involves analyzing debt reports and grouping them as either not due or past
due. Past due accounts are classified further in terms of the length of the period they are past due
(Kulikova et al. 2015).
Standard classifications used in the method include; payment not due which refers to the amount
of money the client has within the range of pay. In the event the payment is due past the required
date, the periods are classified in the order of 30 days past the due payment dates
(Simplestudies.com, 2014). Table 1 below illustrates a sample aging accounts receivable method
for analyzing doubtful debts.

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Table 1
Example of sample data recorded for analysis in the aging method.
Duration The amount owed by
the clients
The estimated
uncollected
percentage amount
Final balance in the
allowance account
Not due 0 0 0
30 to 60 12045 1 120
60 to 90 7884 3 237
Over 90 days 1971 15 296
Total $21900 $653
The allowance is obtained through multiplication of the sum of each classification with the
percentage loss experienced for each category. In general, the possibility of occurrence of bad
debts higher when the payment duration is long past the required time. The aging method
approach employs a more structured way of analyzing bad debts (Business-accounting-
guides.com, n.d). The procedure entails a variety experience rate which is to be applied to each
class of accounts receivable.
The objection to the aging method is that it violates the parallel process. The reports may not be
shown at the estimated realizable value because the allowance for bad debts may be either
excessive or inadequate. Moreover, this method could become prohibitively time consuming if a
large number of accounts are involved (Budhathoki 2018). Lance, a member of the management

Aging Method of Calculating Doubtful Debts 4
staff of Practical Products Ltd also argues that the method requires complex calculations and
would only be fit when used when a business is experiencing rapid growth.
However, Philip, another staff member of the limited stands with the argument that the aging
method would be better in calculating doubtful debts all economic conditions. The technique
clearly outlines the duration due before or past the required time in which the payment ought to
have been done. The approach is considered to be more accurate and scientific because the
possibility of non-payment is correlated with the length of time accounts receivable is reported as
being overdue.

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Reference
Budhathoki, D. (2018). A Statistical Model for Estimating Provision for Doubtful Debts. Journal
of Nepalese Business Studies, 10(1).
Business-accounting-guides.com. (n.d.). Allowance for Doubtful Accounts and Aging of
Accounts Receivable – Accounting Simplified. [online] Available at: http://business-accounting-
guides.com/allowance-for-doubtful-accounts/ [Accessed 17 May 2018].
Kulikova, L., Garyncev, A., and Goshunova, A. (2015). Doubtful Debts Allowance
Development: Stages and Methods of Calculation. Mediterranean Journal of Social Sciences.
Simplestudies.com. (2014). Aging of accounts receivable and bad debt expense - Accounting
Guide | Simplestudies.com. [online] Available at:
http://simplestudies.com/accounts_receivable_aging_and_bad_debt_expense.html [Accessed 17
May 2018].