Business

Transactions
&
The Accounting
Cycle
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

DOUBTFUL ACCOUNTS
- Refer to accounts that are estimated to be
uncollectible as at the end of the accounting period

Methods of accounting for doubtful accounts

1. Allowance method (GAAP)
2. Direct write – off method (BIR Approach)

Methods of Estimating doubtful accounts

1. % of Income method
2. % of Accounts Receivable method
3. Aging of Accounts Receivable method
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Accounting for Doubtful Accounts
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Accounting for Doubtful Accounts
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

1. % of Income method
Provision for doubtful accounts is estimated as a certain per cent of the income
generated during the accounting period.

Pro-forma computations:
Income base (e.g. total service income, service income on account) xx
X rate of application (based on the experience of the Company) x
Doubtful accounts expense xx

Allowance for doubtful accounts, unadjusted (start of the year) xx

Doubtful accounts expense for the year xx
Recoveries of previously written off accounts xx
Accounts written off during the year (xx)
Allowance for doubtful accounts, adjusted xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

1. % of Income method
Illustrative Problem: As at end of the year, the following balances were provided by the
Company:
Accounts receivable balance, December 31 P 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Provision rate for doubtful accounts – 1% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500

Required:
1. Doubtful accounts expense for the year
2. Allowance for doubtful accounts, adjusted as at end of the year
3. Net realizable value of accounts receivable as at end of the year
4. Entry to record the accounts written off during the year
5. Entry to record the accounts recovered during the year
6. Journal entry to record the provision for doubtful accounts
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

1. % of Income method
Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Estimated rate of uncollectibility – 1% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

1. % of Income method
Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Provision rate for doubtful accounts – 1% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

2. % of Accounts Receivable (AR) method

Allowance for doubtful accounts is estimated as a certain per cent of the outstanding
balance of accounts receivable as at end of the accounting period.

Pro-forma computations:
Accounts receivable balance as at end of the period xx
X rate of application (based on the experience of the Company) x
Allowance for doubtful accounts, adjusted xx

Allowance for doubtful accounts, adjusted xx

Accounts written off during the year xx
Recoveries of previously written off accounts (xx)
Allowance for doubtful accounts, unadjusted (start of the year) (xx)
Doubtful accounts expense for the year xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

2. % of AR method
Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Estimated rate of uncollectibility – 10% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

2. % of AR method
Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Estimated rate of uncollectibility – 10% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

3. Aging of Accounts Receivable (AR) method

Allowance for doubtful accounts (AFDA) is estimated based on the age of the accounts comprising the
outstanding balance of accounts receivable as at end of the accounting period.

Pro-forma computations:
Age of AR Balance Rate Required AFDA
0-30 days xx x xx
31-60 days xx x xx
61-90 days xx x xx
above 90 days xx x xx
Total xx xx

Allowance for doubtful accounts, adjusted xx

Accounts written off during the year xx
Recoveries of previously written off accounts (xx)
Allowance for doubtful accounts, unadjusted (start of the year) (xx)
Doubtful accounts expense for the year xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

3. Aging of Accounts Receivable (AR) method

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Allowance for doubtful accounts, January 01 6,000
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
Aging of AR as at year-end:
Age Balance Rate of Uncollectibility
0-30 days 30,000 0
31-60 days 30,000 10%
above 60 days 40,000 15%
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

3. Aging of Accounts Receivable (AR) method

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Allowance for doubtful accounts, January 01 6,000
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
Aging of AR as at year-end:
Age Balance Rate of Uncollectibility
0-30 days 30,000 0
31-60 days 30,000 10%
above 60 days 40,000 15%
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS
Methods of Estimating Doubtful Accounts

3. Aging of Accounts Receivable (AR) method

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 P 100,000
Allowance for doubtful accounts, January 01 6,000
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500
Aging of AR as at year-end:
Age Balance Rate of Uncollectibility
0-30 days 30,000 0
31-60 days 30,000 10%
above 60 days 40,000 15%
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
- Refers to the systematic and rational allocation of the cost of a
depreciable asset over the periods benefitted by its intended use

Elements of Depreciation
Cost – pertains to the cost of acquisition of the depreciable asset which
includes the cost of purchase or construction (fair value at the time of
receipt is acquisition is by way of donation or grant) plus all incidental costs
necessary in bringing the asset to its present location and in preparing the
same for its intended use

Residual value – refers to the amount expected to be recovered or

salvaged from the asset at the end of its estimated useful life

Estimated useful life – the estimated period where benefits from the use of
the depreciable asset are expected to flow to the Company

Depreciable cost – the amount that is left after deducting the residual
value from the cost of the asset. It is the portion of the cost that is subjected
to depreciation
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Methods of computing for depreciation
1. Straight line method (covered under Basic Acctg)
2. Other methods (covered under Intermediate Acctg)
2.1 Other uniform methods
a. Composite method
b. Group method
2.2 Variable methods
a. Output method
b. Production/ machine hours method
2.3 Accelerated method
a. Sum-of-year’s digits method
b. Declining balance method
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

DEPRECIATION
Straight line method of depreciation
Basic formula:
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Illustration: The Company provided the following information relative to the year-end
adjustment for depreciation as at and for the year ended December 31, 2020:

Cost of equipment P 500,000

Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 1: The equipment was acquired on January 01, 2020 and was ready for its
intended use on the same date.

Case 2: The equipment was acquired on October 01, 2020 and was ready for its
intended use on the same date.

Case 3: The equipment was acquired on July 01, 2019 and was ready for its intended
use on the same date.

Case 4: The equipment was acquired on January 01, 2020 and was made ready for its
intended use on April 01, 2020.
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Illustration: The Company provided the following information relative to the year-end adjustment for
depreciation as at and for the year ended December 31, 2020:

Cost of equipment P 500,000

Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 1: The equipment was acquired on January 01, 2020 and was ready for its intended use on the
same date.
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Illustration: The Company provided the following information relative to the year-end
adjustment for depreciation as at and for the year ended December 31, 2020:

Cost of equipment P 500,000

Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 2: The equipment was acquired on October 01, 2020 and was ready for its intended use
on the same date.
CASE 2
1 Depreciation expense [ ( P500,000 - P50,000) / 10 ] x 3/12 11,250.00

2 Depreciation expense 11,250.00

Accumulated depreciation 11,250.00

3 Accumulated depreciation - January 01, 2020 -

Add: Depreciation for the year 2020 11,250.00
Accumulated depreciation - December 31, 2020 11,250.00
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Illustration: The Company provided the following information relative to the year-end
adjustment for depreciation as at and for the year ended December 31, 2020:

Cost of equipment P 500,000

Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 3: The equipment was acquired on July 01, 2019 and was ready for its intended use on
the same date.
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

DEPRECIATION
Illustration: The Company provided the following information relative to the year-end
adjustment for depreciation as at and for the year ended December 31, 2020:

Cost of equipment P 500,000

Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 4: The equipment was acquired on January 01, 2020 and was made ready for its
intended use on April 01, 2020.