How do you calculate debtors allowance?
submitted by neo

ron_the_swan

It's going to be a percentage of the total accounts receivable. You have to get this information from past customer data. Look at old accounts and see how much would typically not be paid from years past. Say you've got 100 debtors and you usually can't collect on 5 of them. You could say 5% of your expected collections should be set aside as debtors allowance, or add a bit as a buffer.

To put it as a formula: Debtors Allowance = Estimated Uncollectible Debtors / Total Debtors x 100%

You'd set this allowance aside as an expense (bad debt expense), and it's going to be a reduction in accounts receivable on the balance sheet.

Dr Jasumback

To find the debtors allowance, you usually estimate how much of your receivables you don't expect to collect. For example, if you think 2% of your total debtors might be uncollectible, and your total debtors are $50,000, then: 2% of $50,000 = $1,000. That's your debtors allowance.

You'd record a $1,000 allowance for "doubtful" accounts.

Schmedrious Pickles

You'd look at your total debtors (check accounts receivable). Decide what percentage of those might not be paid (based on past experience). You know the ones, and your records will show it. Multiply the total unpaid amount from debtors by that percentage. The result is your debtors allowance.

As an example:
Total debt owed to you = $10,000
Estimated uncollectible percentage = 5%
Your debtors allowance = $10,000 x 0.05 = $500