DOUBTFUL ACCOUNTS

Accounting for Doubtful Accounts

an entity that sells on credit assumes the risk that some customers will not
pay their accounts

when an account becomes uncollectible, the entity has sustained a bad debt
loss

2 Method
Allowance Method: requires recognition of a bad debt loss if the accounts are
doubtful of collection
Illustration:
Assume accounts receivable worth P15,000 are considered doubtful of collection.
The entity would be:

If the bad debts were subsequent proven to be uncollectible, the entry to write
off would be:

Write off means the reduction or removal of an asset amoun

If the collection has been made on the accounts receivable written off, then entry
for the recovery would be:

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 Direct Write-Off Method: requires recognition of a bad debt loss when the
accounts are proven to be uncollectible
Illustration:

Assume accounts receivable worth P15,000 are considered doubtful of

collection. The entity would be:
NO ENTRY

If the bad debts were subsequent proven to be uncollectible, the entry to

write off would be:

If the collection has been made on the accounts receivable written off, then
entry for the recovery would be:

If the account title is already closed, use other income account

Estimating Doubtful Accounts

There are 3 methods of estimating doubtful accounts:

Aging of AR (balance sheet approach)

Percent of AR (balance sheet approach)

Percent of Sales (income statement approach)

The amount computed using BS approach is the required allowance.

The amount computed using IS approach is the expense

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 Aging of AR

Accounts are classified as to "age". Each group is then multiplied to a rate

based on entity experience

Illustration:

Assume that the allowance for bad debts has a credit balance of P10,000. The
entry to record the bad debts expense is:

Percent of AR

A certain rate is multiplied with the balance of AR. The rate is based on entity
experience

Illustration:
Assuma an entity has accounts receivable worth P1,000,000 and its allowance for
bad debts has a credit balance of P10,000. Bad debts are estimated at 8% of AR.
To entry to record the bad debts expense is:

Percent of Sales

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 A certain rates is multiplied with the sales (on account or total) for the year

Illustration:

Assuma an entity has accounts receivable worth P1,000,000 and its allowance for
bad debts has a credit balance of P10,000. Bad debts are estimated at 8% of AR.
To entry to record the bad debts expense is:

Correction of Allowance

Assume a new estimate has been established and it requires to reduce the
allowance by P40,000. Moreover, the bad debts expense only has a debit
balance of P25,000. The entry to adjust the allowance would be:

Illustration:

MAGIGING CPA AKO Company reported the following year-end information before
adjustments:

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 Required: Prepared adjusting entry for provision of doubtful accounts under each
of the following independent assumptions:

 Company history indicates that 70% of all sales are even on account and that
normally 3% of it may be doubtful as to collection.

2. 5% of gross sales may prove to be doubtful as to collection

3. Aging of AR indicates that 5,000 may prove to be uncollectible

4. A company policy states that an allowance for bad debts equal to 15% of the
outstanding AR is required

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DOUBTFUL ACCOUNTS 6