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Cash & receivables

Bad debt reserve calculator — allowance by ageing bucket

Size your bad debt reserve from ageing-bucket loss rates, see it as a percent of AR, and compare it against a flat percent-of-sales provision.

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Short answer

A bad debt reserve is the sum of each ageing bucket multiplied by the loss rate you expect from that bucket. On $2,785,000 of AR split across five buckets with rates from 0.5% on current to 55% on 90-plus, the reserve is $97,200 — 3.49% of receivables. Compare it to a flat percent of credit sales.

A bad debt reserve is an estimate of the receivables you will never collect, booked now rather than when the customer finally stops answering. Get the loss rates from your own write-off history and the number defends itself; borrow them from a template and you will be arguing about it at every audit.

Enter each ageing bucket with the loss rate you expect from it. You get the reserve, what it is as a percentage of AR, where the risk concentrates, the top-up needed against your existing allowance, and a side-by-side check against a flat percent-of-sales provision.

Your numbers

Receivables by ageing bucket
$
%
$
%
$
%
$
%
$
%
Percent-of-sales cross-check
$

Invoiced on terms. Excludes cash and card sales.

%

Write-offs ÷ credit sales, averaged over several years.

$

What is already sitting in the allowance account, so the tool can show the top-up entry.

Result

Bad debt reserve, ageing method
$97,200

3.5% of $2,785,000 of receivables

Total receivables$2,785,000
Reserve as % of AR3.5%
Flat percent-of-sales reserve$115,500
Difference between the two methods$18,300
Provision entry needed$15,200
Reserve from 61+ days overdue$59,900
Share is each bucket's contribution to the reserve, not to receivables.
BucketBalanceLoss rateReserveShare
Current$1,860,0000.50%$9,3009.6%
1–30 overdue$540,0002.00%$10,80011.1%
31–60 overdue$215,0008.00%$17,20017.7%
61–90 overdue$96,00020.00%$19,20019.8%
90+ overdue$74,00055.00%$40,70041.9%
Total$2,785,0003.5%$97,200100.0%
Current: $1,860,000 × 0.50% = $9,300
1–30 overdue: $540,000 × 2.00% = $10,800
31–60 overdue: $215,000 × 8.00% = $17,200
61–90 overdue: $96,000 × 20.00% = $19,200
90+ overdue: $74,000 × 55.00% = $40,700
Reserve = $97,200 = 3.5% of $2,785,000 AR
Flat method = $33,000,000 × 0.35% = $115,500 ($18,300 difference)
Provision entry = $97,200 − $82,000 allowance = $15,200
$97,200 is 3.5% of receivables, and the flat percent-of-sales method lands within 18.8% of it, so both rate sets still describe the same ledger. Your allowance stands at $82,000, so this period's provision entry is $15,200. Watch the concentration: the last two buckets are 6.1% of the ledger and 61.6% of the reserve.

Everything is computed in your browser. Nothing you type is sent anywhere or stored.

The formula

Reserve = Σ (Bucket balance × Bucket loss rate) · Flat method: Reserve = Credit sales × Historical loss rate
Bucket balance
Receivables in one ageing band — current, 1–30, 31–60, 61–90, 90+ days past due.
Bucket loss rate
The share of that band you historically never collect. Derived from your own write-off history, not a rule of thumb.
Credit sales
Invoiced-on-terms revenue for the period, used by the flat percent-of-sales method.
Historical loss rate
Write-offs ÷ credit sales over several years, which sets the flat rate.

The ageing method (also called ageing of receivables or the balance-sheet approach) sizes the allowance directly and is what auditors expect for the balance sheet. The percent-of-sales method sizes the expense and is quicker to run monthly. Both should land in the same neighbourhood; a persistent gap means one set of rates is stale.

Worked example

Current (not yet due)
$1,860,000 at 0.5%
1–30 days overdue
$540,000 at 2%
31–60 days overdue
$215,000 at 8%
61–90 days overdue
$96,000 at 20%
90+ days overdue
$74,000 at 55%
Result
Reserve = $97,200 · 3.49% of AR

The five products are $9,300, $10,800, $17,200, $19,200 and $40,700, totalling $97,200 on $2,785,000 of receivables — 3.49%. Note where the risk sits: the 90-plus bucket is 2.7% of the ledger and 41.9% of the reserve. A flat 0.35% of $33,000,000 of credit sales would give $115,500, so the flat method is $18,300 more conservative here.

How to set bad debt reserve loss rates

Do it from history, once a year, with one query: for invoices issued three or more years ago, what share of the balance that reached each ageing band was eventually written off? That gives five defensible rates. The defaults below are placeholders for the shape of the curve, not benchmarks — the steep climb after 60 days past due is the part that matters, because that is where recovery odds fall off.

BucketWhat sits hereWhat drives the rate
CurrentNot yet dueNearly all collects. The rate covers disputes and the occasional sudden insolvency.
1–30 overdueSlow payers and admin frictionMostly a process delay, not a credit event. Rates stay low.
31–60 overdueSomething is wrongUnresolved disputes, missing PO references, a customer starting to stretch.
61–90 overdueGenuine credit riskRecovery odds drop sharply. Rates typically step up several times over.
90+ overdueAssume the worst until proved otherwiseInsolvency, refusal to pay, and invoices nobody owns internally.
Set every rate from your own write-off history. Rates from a template will not survive an audit question.

Ageing method versus percent of sales

The two methods answer different questions and both belong on the schedule. The ageing method sizes the allowance on the balance sheet: it is risk-sensitive, so it moves when the ledger deteriorates. The percent-of-sales method sizes the expense in the P&L: it is smooth, quick and blind to a suddenly ageing ledger.

ComparisonAgeing methodPercent of credit sales
What it sizesThe allowance balanceThe period expense
Sensitive to ageingYes — that is the pointNo
EffortNeeds a clean ageing split every periodOne multiplication
Best used forYear-end and quarter-end balance sheetMonthly accruals between reviews
Fails whenBucket rates are never refreshedThe mix of customers or terms shifts

Reading the result

  • Watch the concentration, not the total. When a bucket holding 2.7% of the ledger produces 41.9% of the reserve, that bucket is the whole collections agenda.
  • Compare the two methods every quarter. A gap that persists in one direction means one set of rates has drifted from reality.
  • Reserve as a percentage of AR is your trend line. It should be stable; a rising percentage on a flat ledger means the ageing is deteriorating underneath a steady total.
  • Exclude what is not credit risk — intercompany balances, unapplied cash sitting as a negative, and deposits held against the account.
  • Name the big single exposures separately. One customer at 90-plus with $60,000 outstanding is a specific reserve decision, not a statistical one.

Where the ageing split comes from

The arithmetic is five multiplications. The work is producing an ageing split that ties to the AR control account, buckets by due date rather than invoice date, and nets credit notes against the right invoices. Ask for receivables by ageing bucket with credit notes applied, by subsidiary, and you get the split with the query printed underneath — so the reserve you book rests on a definition you can read.

Frequently asked questions

How do you calculate a bad debt reserve?

Multiply each ageing bucket by the loss rate you expect from that bucket and add the results. With $1,860,000 current at 0.5% and $74,000 at 90-plus days at 55%, those two lines contribute $9,300 and $40,700. Across five buckets on $2,785,000 of AR the reserve comes to $97,200, or 3.49%.

What is a reasonable bad debt reserve as a percentage of AR?

Whatever your own write-off history supports. The percentage is an output, not a target: a ledger with 3% of its balance past 90 days needs a very different reserve from one with 15% there. Judge the number against your own trend and against your actual write-offs, not against an external figure.

What is the difference between the ageing method and the percentage of sales method?

The ageing method sizes the allowance on the balance sheet by applying loss rates to each ageing bucket, so it reacts when receivables deteriorate. The percent-of-sales method sizes the expense by applying one historical rate to credit sales, which is faster but blind to ageing. Most teams run the ageing method at quarter-end and the flat method monthly.

How do I set the loss rate for each ageing bucket?

From your own history. Take invoices issued three or more years ago, find the share of the balance that reached each bucket and was eventually written off, and use those percentages. Refresh them annually. Rates that came from a template are the first thing an auditor will question and the hardest to defend.

Is bad debt reserve the same as allowance for doubtful accounts?

Yes — the terms are used interchangeably, along with bad debt provision and allowance for expected credit losses. It is a contra-asset that sits against gross receivables, so the balance sheet shows AR net of it. The expense recognised in the period is the movement in that allowance plus any direct write-offs.

How often should the reserve be recalculated?

The balance every reporting period, and the loss rates once a year or after any material change in customer mix, credit policy or trading conditions. Recalculating the balance with stale rates gives you a precise answer to the wrong question, which is the most common weakness in a reserve schedule.

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