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.