BAD DEBTS
ALLOWANCE METHOD
-recognized Bad debts expense when
the collectability of A/R becomes
DOUBTFUL or questionable
-conforms to Accrual basis of
accounting, matching and conservatism
-When accounts becomes certain that
accounts are uncollectible or
WORTHLESS, it is WRITTEN OFF
-When accounts previously written off
are recovered, the write off entry is
REVERSED
DIRECT WRITE OFF METHOD
- Bad debts is directly written off from
A/R only when WORTHLESS (NO
ENTRY if doubtful)
-DOES NOT CONFORM to the accrual
basis of accounting, matching and
conservatism
- Recorded only when uncollectibility is
CERTAIN
-When subsequently recovered, the
collection is recognized as GAIN
 BAD DEBTS
Cases Allowance method Direct Method
1. A/R of P5,000 is found to be ✓Bad debt expense 5,000 No entry
doubtful of collection Allowance for Bad debts 5,000
2. The P5,000 doubtful account Allowance for bad debts 5,000 Bad debts Expense 5,000
is deemed worthless(certain) ✓Accounts Receivable 5,000 Accounts Receivable 5,000
and needs to be written off.
3. The P5,000 previously written Accounts Receivable 5,000 No entry
off is subsequently recovered Allowance for bad debts 5,000
To reverse the previously written
off
Cash 5,000 Cash 5,000
Accounts Receivable 5,000 Gain on recovery 5,000
To record the collection of A/R
3 Methods in estimating Doubtful Accounts

 Percentage of Credit Sales (% of credit sales)

 (Sales-Cash Sales-Sales returns/discounts) x
% = BDE
 Percentage of Accounts Receivable (% of A/R)
 Ending balance of A/Rx% = Required AFBD
 Aging the Accounts Receivable
 Receivable Balances (every days outstanding)
x % uncollectible = Required AFBD
 Estimating Doubtful Accounts
Percentage of Credit Percentage of Accounts Aging the Accounts
Sales (% of credit sales) Receivable (% of A/R) Receivable

(Sales-Cash Sales-Sales Ending balance of A/R x % Receivable Balances

returns/discounts) x % = = Required AFBD (every days outstanding) x
BDE % uncollectible = Required
AFBD

✓ ✓
 Bad debts- Problems
The following accounts were abstracted from Aleihsor’s company’s
unadjusted Trial Balance at December 31,2021.
Revenues P 200,000
Accounts Receivable 40,000
Allowance for Doubtful accounts,beg 1,500

Case 1. Bad debts are estimated at 1% of Revenues.

Case 2. Bad debts are estimated at 9% of Accounts receivable.
Case 3. Based on the aging of receivables, it has been determined that
the Allowance for Bad debts should be increased by P1,000.
Requirement: Prepare the Adjusting entry and the Net Realizable Value
of Accounts Receivable
 Bad debts- Problems
Case 1. Bad debts are estimated at 1% of Revenues.

Case 2. Bad debts are estimated at 9% of Accounts receivable.

Case 3. Based on the aging of receivables, it has been determined that the
Allowance for Bad debts should be increased by P1,000.
 Depreciation Expense
On February 1,2021, your business acquired computer
equipment for P400,000. The estimated salvage value is
50,000. You expect to use the computer for the next 4
years. What is the adjusting entry on December 31,2021 to
take up depreciation expense?
Depreciation Expense – computer equip (400k-50k x 11/12) 80,208
Accumulated depreciation – comp equip 80,208