Definition and Concept of Aging Schedule for Calculating Provision for Doubtful Debts:
Sometimes provision for doubtful debt is calculated with the help of aging schedule of trade receivables. This concept is defined and explained below:
“The aging schedule of trade receivables involve analyzing the individual accounts found in the sales ledger. Customers’ accounts are categorized in an analysis sheet according to the length of time that they have been outstanding. A different percentage based on past experience and current market conditions are then applied to different customer groups”.
Normally percentage for provision for doubtful debts rise according to the ages of debts outstanding. This method is considered as most accurate and reliable measure to determine the provision for doubtful debts.
A company has the following three possible aging schedules for calculating provision for doubtful debts:
(i) Trade receivables owing less than 120 days = 5% of trade receivables’ amount
(ii) Trade receivables owing less than 180 days = 10% of trade receivables’ amount
(iii) Trade receivables owing less than 365 days = 40% of trade receivables’ amount