Bad debts estimation under allowance method

Percent of accounts receivable

· Under this method, the accounts receivable closing balance is multiplied by the percentage the management
estimated uncollectible accounts.

· This method is based on the idea that a percentage of accounts receivable will be uncollectible, and management
uses past experiences and current economic situations as a guide to the percentage used.

· For this reason, the estimated amount of uncollectible accounts is to be equal to the adjusted ending balance of the
allowance for uncollectible accounts. The adjusting entry amount must therefore be the amount required that
results in that ending balance of the allowance.

Assume that on December 31, 2019, DBK Inc. is having P1,000,000 ending balance of Accounts Receivable. It was
estimated that 3% of it will be considered as uncollectible. The estimated/required balance of the Allowance for
Uncollectible Accounts is P30,000 (P1,000,000 x 3%)

Journalize the bad debts expense:

1. If there is no beginning balance of the Allowance for Uncollectible Accounts.

Dec. 31 Uncollectible Account Expense 30,000

Allowance for Uncollectible Accounts 30,000

2. If there is credit balance of the Allowance for Uncollectible Accounts before adjustment amounting to P10,000.

Dec. 31 Uncollectible Account Expense 20,000

Allowance for Uncollectible Accounts 20,000
P30,000 - P10,000 = P20,000

3. If there is debit balance of the Allowance for Uncollectible Accounts before adjustment amounting to P10,000.

Dec. 31 Uncollectible Account Expense 40,000

Allowance for Uncollectible Accounts 40,000
P30,000 + P10,000 = P40,000
The net realizable value of DBK’s receivables is P970,000 (P1,000,000 – P30,000)

Aging of accounts receivable

· Generally, the older the uncollected account, the more likely it is to be uncollectible. For this method, the accounts
receivable is grouped into categories based on length of time they have been outstanding.

· Just like the percentage of outstanding accounts receivable method, entities will use their experience to estimate
the percentage of their outstanding receivables that will become uncollectible for each aged group and prepare an
aging schedule. The sum of all the amounts by group represents the total estimated uncollectible accounts.

· Just like the percentage of accounts receivable method previously discussed, the estimated amount of uncollectible
accounts using this method is to be equal to the ending balance of the Allowance for Uncollectible Accounts. The
adjusting entry amount must therefore be whatever amount is required to achieve this ending balance.
Percentage of Net Sales

· Under this method, bad debts expense = net credit sales x percentage of sales

· Bad debts expense is computed without regard to the beginning balance of ADA, write-offs or recoveries
Percentage of A/R
Aging of A/R

NRV = 310,000 – 9,000 = 301,000