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Analysis of Bad Debts
Difficulty: Advanced
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company's gross accounts receivable.The relationship between the allowance and the balance in receivables should be relatively constant unless there is a change in the economy overall or a change in customer base.
Allowance for Doubtful Accounts Receivable
Source: Based on data from Automatic Data Processing Inc. Annual Reports
2017 Calculations
1 Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of accounts receivable, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | Automatic Data Processing Inc.'s allowance as a percentage of accounts receivable, gross declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
