ALLOWANCE EXHAUSTION RATE

Description: Is the amount in the allowance for doubtful accounts sufficient? This is a common question that is debated between the controller and the outside auditors every year, with the controller taking the optimistic view and the auditors a more pessimistic view. One way to examine this issue is through the allowance exhaustion rate, which is the period of time it would take the allowance to be exhausted as of any point in time, given the amount of subsequent receivable write-offs. This information is useful on a historical trend line, since the allowance exhaustion rate from previous periods can be applied to the current allowance for doubtful accounts to determine whether it is adequate.

Formula: Subtract all subsequent receivable write-offs from the allowance for doubtful accounts until it has been exhausted, and measure the time required to reach that point. Do not add to the calculation any subsequent additions to the allowance.