 There are three common ways to estimate the amount of bad debt expense to be recorded under the allowance method. They are the percent of sales method, percentage of receivable method, and the aging of accounts receivable method. We will learn about the aging of receivables method in this short video. The aging of receivables method is sometimes called the balance sheet approach to estimating bad debt expense because it focuses on the balance sheet account allowance for doubtful accounts. The method calculates what the adjusted balance in the allowance for doubtful accounts should be. Then we record bad debt expense to make that balance correct. Usually this method starts with a table. We age our invoices because the collectability of older accounts are less than recent accounts. In this example, you can see that the total amount of accounts receivable is $17,500, but we have classified that into four subtotals based on aging. Then we use historical bad debt rates for each of those aging columns. Then we multiply the aged columns, the totals by the historical rate to determine how much of each classification we think we won't collect. The total of these becomes the amount of accounts receivable we think we won't collect, and that should be the balance in the allowance for doubtful accounts. So in this example, we think the balance in the allowance for doubtful accounts should be credit of $825. $825 is not the amount of adjusting entry, however. Let's look at this example. If the allowance for doubtful accounts had an unadjusted credit balance of $500, then the adjusting entry amount required to bring this balance to $825 is a debit to bad debt expense and a credit to the allowance for doubtful accounts for an additional $325. Sometimes you will see an example like this. If we've written off more accounts than expected, we could temporarily have a debit balance in the allowance for doubtful accounts. In this case, we have an unadjusted debit balance of $800. In order to make this account a credit balance of $825, we need to debit bad debt expense and credit the allowance for doubtful accounts for $1,625.