ACGA 504/ HCGA 507

GENERAL ACCOUNTING
- PART 2

College of Business and Accountancy

College of Hospitality Management
Holy Trinity University
2nd Sem.,AY 2021-2022
MEASURING BUSINESS
INCOME

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 TOPICS
• Measuring Business Income
• Accrual vs. Cash Accounting
• Adjusting Process
• Basic Adjusting Entries
• Accruals
• Prepayments
• Pre-collections
• Depreciation
• Amortization
• Estimated Uncollectible Accounts
• Ending Inventory
• Bank Reconciliation
• Journalizing Adjusting Entries
• Posting of Adjustments
• Preparation of Adjusted Trial Balance
• Preparation of Financial Statements
BASIC ADJUSTING ENTRIES
• Accruals
• Prepayments
• Pre-collections
• Depreciation and amortizations
• Estimated uncollectible accounts
• Ending inventory
• Bank reconciliation
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Portion of long overdue accounts receivables
- Other names: bad debts, doubtful accounts
- Adjustment is necessary to separate the uncollectible (losses) from realizable assets to
conform to the accounting principle that an item is qualified as asset is it could provide
present or potential future benefits. Thus, when the claim is long overdue it DOES NOT
provide present or future benefits.
- PRUDENCE convention provides that the business should anticipate losses in order not
to overstate the assets reported in the statement of financial position.

- Methods:
- DIRECT METHOD or Actual write-off method: records bad debts only when the account
receivable is ascertained to be worthless. Worthless accounts are removed from the
books of accounts. This is the only method allowed for BIR purposes.
- ALLOWANCE METHOD: records bad debts expense even if the uncollectible is only
estimated. It does not remove the accounts receivables from the books but provides
allowance only for possible non-collection. Used for general purpose reporting.
ILLUSTRATION:

1. In Yearon2021,
Sales account,
the following
P50,000 transactions occurred:
2. Amount
Sales onestimated
account, P50,000
to be uncollectible, P6,000
3. Actual amount
Amount estimated
ascertained
to be uncollectible,
to be worthless
P6,000
and was eventually written off.
4. Actual amount ascertained to be worthless and was eventually written off, P2,000

ENTRIES

1. To record sales on account.

Allowance Method Direct Method

Accounts Receivables…….50,000 Accounts Receivables…….50,000

Sales ……………………………50,000 Sales ……………………………50,000
ILLUSTRATION:

1. In Yearon2021,
Sales account,
the following
P50,000 transactions occurred:
2. Amount
Sales onestimated
account, P50,000
to be uncollectible, P6,000
3. Actual amount
Amount estimated
ascertained
to be uncollectible,
to be worthless
P6,000
and was eventually written off.
4. Actual amount ascertained to be worthless and was eventually written off, P2,000

ENTRIES

2. To record estimated uncollectible amount

Allowance Method Direct Method

Bad Debts Expense …………. 6,000 No entry

Allowance for Bad Debts……….. 6,000
ILLUSTRATION:

1. In Year 2021, the following transactions occurred:

2. Sales on account, P50,000
3. Amount estimated to be uncollectible, P6,000
4. Actual amount ascertained to be worthless and was eventually written off, P2,000

ENTRIES

3. To record actual amount written off

Allowance Method Direct Method

Allowance for Bad Debts ……... 2,000 Bad Debts ……... 2,000
Accounts Receivables…… ……….. 2,000 Accounts Receivables…… ……….. 2,000
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Recovery of Accounts Receivables Written Off

- When an account written of is recovered or collected, the customer’s account should be

recharged to reestablish the customer credit standing with the company.
ILLUSTRATION:
A. Suppose, P1,000 was recovered in 2021, what would be the entries?
B. If the P1,000 was recovered in 2022, what would be the entries

A. If recovered on the same year it was written off or in 2021:

1. To record the recharging of accounts

Allowance Method Direct Method

Accounts Receivables…….............. 1,000 Accounts Receivables ... 1,000

Allowance for Doubtful Accounts ……….. 1,000 Bad Debts ……..…… ……….. 1,000
 ILLUSTRATION:
A. Suppose, P1,000 was recovered in 2021, what would be the entries?
B. If the P1,000 was recovered in 2022, what would be the entries

B. If recovered in 2022:

1. To record the recharging of accounts

Allowance Method Direct Method

Accounts Receivables…….............. 1,000 Accounts Receivables ... 1,000

Allowance for Doubtful Accounts ……….. 1,000 Recovery of Accounts
Written-off…………………….. 1,000
(income)
 ILLUSTRATION:
A. Suppose, P1,000 was recovered in 2021, what would be the entries?
B. If the P1,000 was recovered in 2022, what would be the entries

A. If recovered on the same year it was written off or in 2021:

2. To record the collection of accounts

Allowance Method Direct Method

Cash …………………………………..1,000 Cash …………………………………..1,000

Accounts Receivables…….............. 1,000 Accounts Receivables…….............. 1,000
 ILLUSTRATION:
A. Suppose, P1,000 was recovered in 2021, what would be the entries?
B. If the P1,000 was recovered in 2022, what would be the entries

B. If recovered in 2022, the entry is the same as in “A”.

2. To record the collection of accounts

Allowance Method Direct Method

Cash …………………………………..1,000 Cash …………………………………..1,000

Accounts Receivables…….............. 1,000 Accounts Receivables…….............. 1,000
 ESTIMATED UNCOLLECTIBLE ACCOUNTS

- Methods of Estimating Doubtful Account:

- 1. Statement of Comprehensive Income Method (SCI)
- - Percent of Sales (% of Sales)
- 2. Statement of Financial Position Method (SFP)
- - Percent of Accounts Receivables (% of AR)
- - Aging the accounts receivables (AAR)
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Treatment of Computed Amount

Method Computed Amount Category of Account

% of Sales Doubtful account expense SCI as operating expense

% of AR Ending balance of allowance for SFP as contra-asset account

doubtful account
AAR Ending balance of allowance for SFP as contra-asset account
doubtful account
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Percent of Sale

- This method is usually used when preparing interim financial statements

- This method apportions a percent of sales as estimated uncollectible.
ILLUSTRATION:
As of September 30, 2021, Bromeliad Company has the following data:

Sales, P3,000,000; Accounts Receivable, P700,000; Allowance for Doubtful Account,

P3,000. It was estimated that 1% of the sales are deemed uncollectible.

To compute the bad debts expense:

Estimated doubtful accounts = Sales x %

Estimated doubtful accounts = P3,000,000 x 1% = P30,000

ENTRIES:

Doubtful Accounts Expense………………………………..30,000

Allowance for Doubtful Accounts…………………………… 30,000
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Percent of Accounts Receivable

- This method apportions a percent of sales as adjusted ending accounts receivables as

estimated uncollectible accounts.
- This is generally used in preparing year end financial reports.
- The allowance for doubtful accounts computed is required to be reported as contra-
asset.
ILLUSTRATION:
As of September 30, 2021, Bromeliad Company has the following data:

Sales, P3,000,000; Accounts Receivable, P700,000; Allowance for Doubtful Account,

P33,000. It was estimated that 5% of the accounts receivables are deemed uncollectible.

To compute the bad debts expense:

Estimated doubtful accounts = Accounts Receivables x %

Estimated doubtful accounts = P700,000 x 5% = P35,000
ENTRIES:

Doubtful Accounts Expense……………………………….. 2,000

Allowance for Doubtful Accounts…………………………… 2,000
Required allowance (5% of P700,000) 35,000.00
Less recorded allowance 33,000.00
Increase in Allowance 2,000.00
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Aging of Accounts Receivables

- This method is based on classified past due accounts receivables covering a particular
period which is multiplied by its specific estimated uncollectible percentage based on the
enterprise’s experience of doubtful accounts

- This generally used in preparing year end statements.

- Computed amount is used as contra asset.

ILLUSTRATION:
As of September 30, 2021, Bromeliad Company has the following data:

Sales, P3,000,000; Accounts Receivable, P700,000; Allowance for Doubtful Account,

P33,000. Ages of receivables and their corresponding percentage of collections are as
follows:

Ages of Accounts Receivables Balance Collectible Percentage

Not due P250,000 98%
1-60 days 200,000 95%
61-120 days 100,000 90%
121-180 days 75,000 88%
181-365 days 50,000 70%
More than 365 days 25,000 60%
 ILLUSTRATION:
Required allowance for doubtful accounts as computed are as follows

Uncollectible Percentage (100% -

Ages of Accounts Receivables Balance Collectible Percentage Required Allowance
collectible percentage)
Not due 250,000 98%
2% 5,000.00
1-60 days 200,000 95%
5% 10,000.00
61-120 days 100,000 90%
10% 10,000.00
121-180 days 75,000 88%
12% 9,000.00
181-365 days 50,000 70%
30% 15,000.00
More than 365 days 25,000 60%
40% 10,000.00

59,000.00
 ILLUSTRATION:
ENTRIES:
Doubtful Accounts Expense………………………………..26,000
Allowance for Doubtful Accounts…………………………… 26,000

Required allowance 59,000.00

Less recorded allowance 33,000.00
Increase in Allowance 26,000.00
ESTIMATED UNCOLLECTIBLE ACCOUNTS
- Debit Balance of Allowance for Doubtful Accounts

- Normal balance of Allowance for Doubtful Accounts is credit (CR).

- This accounts may reflect a debit balance due to write-off. It does not eliminate the
account and it only records the doubtful accounts expense in advance. This will be
corrected at the end of the year.
Exercises
Given: For 2021, the company has Sales, 1.000,000. The balances of Accounts Receivable
and Allowance for Bad Debts are P500,000 and P45,000, respectively.

1. If it is estimated that 0.05% of the sales is uncollectible, compute the bad debts
expense. Give the journal entry.

2. It is estimated that the uncollectible is 10% of the accounts receivable. Compute the
bad debts expense and give the journal entry.

3. It is estimated that the uncollectible is 5% of the accounts receivable. Compute the

bad debts expense and give the journal entry.
Given: For 2021, the company has Sales, 1.000,000. The balances of Accounts Receivable
and Allowance for Bad Debts are P500,000 and P45,000, respectively. Details of the
accounts receivable and experience on their collectability are listed below.

Ages of Accounts Receivables Balance Collectible Percentage

Not due 300,000 98%
1-60 days 70,000 95%
61-120 days 50,000 90%
121-180 days 40,000 80%
181-365 days 30,000 70%
More than 365 days 10,000 50%
500,000

Compute the allowance for bad debts and give the adjusting entry at the end of the
year.