INTERMEDIATE ACCOUNTING 1

CHAPTER 5
ESTIMATION OF DOUBTFUL ACCOUNTS

Methods of Estimating Doubtful Accounts

Aging of A/R Percent of A/R Percent of Sales

Statement of financial Statement of financial Income statement

position approach position approach approach

Req. AFDA Req. AFDA DAE

➢ To compute for DAE:
Subtract Allowance
before adjustment from
AFDA, end

More accurate and Simple to apply Eliminate extra work

scientific computation (Recording cash sales & credit
sales)

Presents fairly the A/R at Presents A/R at estimated A/R may NOT be shown at
NRV NRV estimated NRV (AFDA may
excessive/inadequate)

Violates matching process Violates principle of Proper matching of cost

matching bad debt loss against revenue (bad debt
against sales revenue loss directly related to sales)

Unsatisfactory (considerable
fluctuation in cash and credit
sales periodically)

Time consuming Loss experience rate

(difficult to obtain & may not
reliable)

Not due or past due

To record DAE:
Doubtful Accounts xxx
AFDA xxx

*Past Due
● Period beyond maximum credit terms.

*Credit Terms
 ● Determine whether the account is past due.
*Where allowance is excessive/inadequate
● Treatment of the discrepancies
➢ Error
➢ Component of P/L
● Correction
➢ Addition/subtraction from DAE

Adjustment of Excessive/Inadequate Allowance

Inadequate Excessive

Doubtful Accounts xxx AFDA xxx

AFDA xxx Doubtful Accounts xxx