So we take the net account receivable on the balance sheet,
add back the allowance to get the gross, we did that couple of slides ago.
Then, we take the allowance divided by the gross to get the percent on collectible.
Now, before the virtual students you've asked question,
I know this wasn't one of the two methods we learned.
One of the methods we learned were the percentage sales method.
But to figured out that percentage we need credit sales.
We learned the aging of account sale method to that we needed
to know a breakdown of receivables by age.
As users financial statements, we often don't have those piece of information.
So as a quick and dirty approach to get the percent uncollectible,
I like to take the allowance divided by the gross accounts receivable.
So for instance, at the end of 2008, we have 13,951 of gross accounts receivable.
What percent of those do we expect not to collect, 7.3% or 1,021.
Now, what we're going to do is apply the percentage from the prior year,
2.7%, to the current year balance and
gross accounts receivable to get the expected balance.
So this calculation basically says, let's say that TK
did not increase their percent from 2.7 to 7.3, but
instead kept it at 2.7, if they had,
they're allowed to be 2.7% of 13,951 or 377.
So that's the expected allowance if they kept last year's rate.
Then, as a final step, we just take the difference between those two.
And it tells us how much bad debt expense increased, so
we do to increasing the percent of uncollectibles, so
by increasing assumption of uncollectible percent from
2.7 to 7.3, it add it 644 to the Bad Debt Expense.
Now, notice the allowance is total went up by 800 so a lot of the increase
in the allowance was, not do to the growth and accounts receivable, but
rather do to this increased assumption for the percent of uncollectibles.