How to Calculate Total Estimated Uncollectibles

by Kirk Thomason; Updated September 26, 2017

Companies can induce higher sales revenue by offering customers a short time period to pay for goods and services. This creates accounts receivable, an asset that indicates a company expects to receive cash in an upcoming time period. Though sound in principle, not every customer will pay the money owed to a company. This failure to pay accounts receivable leads companies to declare the expected uncollectible accounts receivable. A common method is the percent of credit sales that determines total uncollectible accounts.

Step 1

Review the previous year’s general ledger.

Step 2

Calculate the total credit sales by adding up all sales involving accounts receivable.

Step 3

Look at the final income statement from the previous year to determine the amount of bad debts expense. This is the total accounts receivables written off as uncollectible.

Step 4

Divide the total bad debts expense by total credit sales. This percentage is the expected bad debts expense for upcoming periods. For example, if total bad debts was $1,000 and total credit sales was $10,000, then the expected bad debts is 10 percent, since $1,000 / $10,000 = .10 = 10 percent (multiply be 100 to get a percentage).

Step 5

Multiply current credit sales from the percentage in Step 4 to estimate current uncollectible accounts receivable. If current credit sales is $15,000, then the estimated uncollectible accounts receivable is $1,500, since $15,000 * .10 = $1,500.

References

  • "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.