So we take the net accounts receivable on the balance sheet,

add back the allowance to get the gross.

We did that a couple slides ago.

Then we take the allowance divided by the gross to get the percent uncollectible.

Now before the virtual students even ask the question,

I know this wasn't one of the two methods we learned.

One of the methods we learned were the percent of sales method, but

to figure out that percentage we need credit sales.

We learned the aging of accounts receivable method,

to that we need to know a break down of receivables by age.

As user's financial statements we often don't have those pieces 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 in 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 their allowance would 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 solely due to

increasing the percent of uncollectables.

So by increasing our assumption of uncollectable percent

from 2.7 to 7.3, it added 644 to the bad debt expense.

Now notice the allowance total went up by 800, so a lot of the increase

in the allowance was not due to the growth in accounts receivable, but

rather due to this increased assumption for the percent of uncollectibles.