Methods for Measuring the Impairment of Accounts Receivable

Accounts receivable consists of amounts from customers. Companies are required to make ongoing estimates related to the collectability of accounts receivables and to maintain an allowance for estimated losses due to customers’ inability to make the payments. Changes in economic conditions, in collection efforts or in trade credit policies may cause differences in estimates of uncollectible accounts. The article reviews the methods for measuring the impairment of accounts receivable: percentage of sales, percentage of receivables, aging schedule, and roll-rate matrix. Under these methods future expectations for bad debts are determined, based on historical level of credit losses and on judgements about the creditworthiness of the customers.