Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb. Compute estimated doubtful

accounts using various methods.

Metalanguage
For you to demonstrate ULOb, you will need to have an operational
understanding of the following terms below.
1. Accounts receivable - account maintained for the sale of goods and services
in the ordinary course of business and arising from an oral promise to pay.
2. Doubtful accounts – this refers to the portion on the accounts receivable to
be recognized as expense that are deemed uncollectible
3. Allowance for doubtful accounts – the contra-asset account of accounts
receivable that reflect the uncollectibility of the accounts
4. Net realizable value – refers to the amount of accounts receivable that can
be collected in the future.
5. Past due – these are long overdue accounts of the customers that are
outstanding beyond the credit period.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to
understand the following essential knowledge lay down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus,
you are expected to utilize other books, research articles and other resources that
are available in the university’s library e.g. ebrary, search.proquest.com etc., and
even online tutorial websites.

1. Estimation of Doubtful Accounts

Methods of estimating doubtful accounts

a. Aging of accounts receivable or “statement of financial position approach”

b. Percent of accounts receivable or also “statement of financial position
approach”
c. Percent of sales or “income statement approach”

A. AGING OF ACCOUNTS RECEIVABLE

The accounts receivable with open balances are grouped according to age and
assigned with a certain percentage that correspond the estimated portion of
uncollectibility. With this, the estimated doubtful accounts will be determined. Below
are common groupings of accounts receivable as to age or past due:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. Not due
b. 1 to 30 days past due
c. 31 to 60 days past due
d. More than 60 days past due

The allowance is determined by multiplying the total of each classification by the rate
or percent of loss experienced of each category. This method has the advantage of
presenting fairly the accounts receivable at net realizable value.

Illustration:

The following data are summarized in aging the accounts receivable at the end of
the period:
(a) (b) (a x b)
Balance Experience Required
rate allowance
Not due 500,000 1% 5,000
1-30 days past due 300,000 2% 6,000
31-60 days past due 200,000 4% 8,000
More than 61 days past due 200,000 15% 30,000
1,200,000 49,000

The amount computed by aging of accounts receivable represents the required

allowance of doubtful accounts meaning the balance of the allowance account at the
end of the period. Thus, if the balance of the allowance account before adjustment is
P10,000 credit, the doubtful account is determined as:
Required allowance 49,000
Less: allowance balance before adj. 10,000
Doubtful accounts expense 39,000

By T-account:

Allowance for doubtful accounts

Balance before adjustment 10,000
Doubtful accounts expense 39,000
(SQUEEZED)
Required allowance 49,000
(ending)

To record the doubtful accounts expense:

Doubtful accounts expense 39,000
Allowance for doubtful accounts 39,000

Note that “allowance for doubtful accounts” and “doubtful accounts expense” are
parallel accounts, however, it is not necessary to recognize/report the same amount
as the other. In the example above, the amount of P49,000 allowance for doubtful

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

accounts will be reported in the statement of financial position while P39,000

doubtful accounts expense will be reported in the income statement.

B. PERCENT OF ACCOUNTS RECEIVABLE

In this method, there is no need to categorize the receivable into ages. Only one
experience rate will be used and multiplied to the entire accounts receivable to get
the required allowance balance.

Illustration:

The balance of accounts receivable is P1,200,000 and the credit balance in the
allowance for doubtful accounts is P10,000. Doubtful accounts are estimated at 4%
of accounts receivable.

Required allowance (1,200,000 x 4%) 48,000

Less: credit balance in allowance 10,000
Doubtful accounts expense 38,000

Journal entry:
Doubtful accounts expense 38,000
Allowance for doubtful accounts 38,000

C. PERCENT OF SALES

In this method, the net sales will be used and multiplied by the experience rate to
arrive at the amount estimated as doubtful accounts. However, unlike the other
methods, here, the product represents the amount of doubtful accounts expense and
not the required allowance balance.

Arguments on the percent of sales method

When “percent of sales” method is used in computing for doubtful accounts, proper
matching of cost against revenue is achieved because the bad debt loss recognized
for the period is directly related to the revenue earned for the same period.

Illustration:

The following accounts are gathered from the ledger:

Accounts receivable 1,000,000

Sales 5,075,000
Sales return 50,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Sales discount 25,000

Allowance for doubtful account, before adj. 20,000

The entity uses percent of sales as the method of estimating doubtful accounts with
an experience rate of 1% of net sales.

First, compute the doubtful accounts expense. That is, net sale of P5,000,000
(P5,075,000-P50,000-P25,000) multiply by 1% equals P50,000. To record the
doubtful accounts expense:
Doubtful accounts expense 50,000
Allowance for doubtful accounts 50,000

The allowance balance after the adjustment is computed as follows:

Allowance balance before adjustment (credit) 20,000

Add: doubtful accounts expense 50,000
Allowance balance after adjustment (credit) 70,000

Or by T-account:

Allowance for doubtful accounts

Balance before adjustment 20,000
Doubtful accounts expense 50,000
Required allowance 70,000
(ending)

Correction in allowance for doubtful accounts

Where the allowance is insufficient of excessive, an adjustment for the correction

should be made. The correction is to be reported in the income either as an addition
to or subtraction from doubtful accounts expense. Accordingly, if there’s a need to
increase the allowance, then the adjustment will be:
Doubtful accounts expense xx
Allowance for doubtful accounts xx
If there’s a need to decrease the allowance, the adjustment will be:
Allowance for doubtful accounts xx
Doubtful accounts expense xx

Note: A decrease in the allowance should be only to the extent of the allowance
balance or just become zero. If the decrease in the allowance exceeds the balance
of the doubtful accounts expense, the excess will be charged to miscellaneous
income, as such decrease is considered abnormal.

For example, if the amount of decrease in allowance is P30,000, and the doubtful
accounts expense has a balance of P20,000 only, the excess of P10,000 is charged
to miscellaneous income. To record the adjustment:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Allowance for doubtful accounts 30,000

Doubtful accounts 20,000
Miscellaneous income 10,000

Debit balance in allowance account

As we all know, allowance for doubtful account is an example of a contra-asset

account which is shown as a deduction from an asset account, Accounts receivable
for example. A contra-asset account a normal balance of “credit”, thus, same as for
the allowance for doubtful accounts. However, it is also possible that the allowance
account may have a “debit” balance that means a negative balance. This negative
balance may happen before any adjustment to allowance account is made arising
from inadequate balance after write-off during the year.

For example, at the beginning of the year, allowance account has a credit balance of
P30,000 and during the year, the entity write-off customer’s account that is
considered worthless in the amount of P50,000. To record the write-off:
Allowance for doubtful accounts 50,000
Accounts receivable 50,000

In effect of the write-off, the allowance account will have a debit balance of P20,000.
Allowance for doubtful accounts
Balance, beginning 30,000
Write-off of worthless 50,000
account
Balance before adjustment 20,000

To continue the example – if at the end of the year, the required allowance is
P40,000, the adjustment should be:
Allowance for doubtful accounts
Balance, beginning 30,000
Write-off of worthless 50,000
account
Balance before adjustment 20,000 Doubtful accounts expense 60,000
(SQUEEZED)
Required allowance (end) 40,000

Journal entry:
Doubtful accounts expense 60,000
Allowance for doubtful accounts 60,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Self Help: You can also refer to the sources below to help you
further understand the lesson.

Valix, C., Peralta, J. F., & Valix, C. A. M. (2020). Intermediate Accounting. (2019 ed.,
Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.
Valix, C., Peralta, J. F., & Valix, C. A. M. (2017). Financial accounting- first part.
(2017 ed., Vol. 1). Manila, Philippines: GIC enterprises & Co., Inc.
Edmonds, T., Edmonds, C. McNair, F. & Olds, P. (2016). Fundamental financial
accounting concepts. (9th ed.). New York, NY: McGraw-Hill Education.

Let’s Check

Activity 1. Getting acquainted with the essential terms in the accounts receivable is
not enough, what also matters is you should also be able to explain its concepts.
Now, I will require you to explain thoroughly your answers.
1. When is an account past due?
______________________________________________________________
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______________________________________________________________
2. Explain the percentage of sales method of estimating doubtful accounts.
______________________________________________________________
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______________________________________________________________
______________________________________________________________
______________________________________________________________
3. Explain the treatment of an inadequate or excessive allowance for doubtful
accounts.
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______________________________________________________________
______________________________________________________________
______________________________________________________________
4. What does a debit balance in the allowance for doubtful accounts indicate?.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________

Activity 2. Multiple choice questions.

1. One of the objectives for the creation of allowance for uncollectible accounts is to
be able to charge the loss against the income of the period to which the loss is
associated. The method which should be used to attain this objective is:
a. percentage of sales

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

b. percentage of open accounts

c. aging of accounts receivable
d. direct write off of bad debts
2. A method of estimating doubtful accounts that emphasized asset valuation is the
allowance method based on
a. Aging of accounts receivable
b. Direct write off
c. Gross sales
d. Credit sales less returns and allowances
3. When an accounts receivable aging schedule is prepared, the resulting amount
from the computation
a. When added to the total accounts written off during the year is the desired
credit balance of the allowance for doubtful accounts at year-end
b. Is the amount of doubtful accounts expense for the year
c. Is the amount that should be added to the beginning allowance for doubtful
accounts to get the doubtful accounts expense for the year.
d. Is the amount of desired credit balance of the allowance for doubtful accounts
to be reported at year-end
4. Estimation of uncollectible accounts receivable based on percentage of sales
a. Emphasizes measurement of accounts receivable
b. Emphasizes measurement of bad debt expense
c. Emphasizes measurement of total assets.
d. Is acceptable on for tax purposes
5. Which concept relates to the allowance method in accounting for uncollectible
accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective
information
b. Bad debt expense is based on the actual amount determined to be
uncollectible
c. Bad debt expense is an estimate that is based only on aging of accounts
receivable.
d. Bad debt expense is a management determination

Let’s Analyze
I. Multiple choice problem solving.
1. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales
but 50% of Delta’s customers take advantage of the discount. Delta uses the
gross network method of recording sales and trade receivables. An analysis of
Delta’s trade receivables balances at December 31, 2014 revealed the following:
0-15 days $100,000 100%
16-30 days 60,000 95%
31-60 days 5,000 90%
Over 60 days 2,500 $500
$167,500
In its December 31, 2014 balance sheet, what amount should Delta report for
allowance for discounts?
a. $1,000 c. $1,620
b. $1,675 d. $2,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. Fenn Stores, Inc. had sales of $1,000,000 during December, 2014. Experience
has shown that merchandise equaling 7% of sales will be returned within thirty
days an additional 3% will be returned within ninety days. Returned merchandise
is readily resalable. In addition, merchandise equaling 15% of sales will be
exchanged for merchandise of equal or greater value. What amount should Fenn
report for net sales in its income statement for the month of December 2014?
a. $900,000 c. $850,000
b. $780,000 d. $750,000

3. At January 1, 2019, Jamin Co. had a credit balance of $560,000 in its allowable
for uncollectible accounts. Based on past experience, 2% of Jamin’s credit sales
have been uncollectible. During 2019, Jamin wrote off $325,000 of uncollectible
accounts. Credit sales for 2019 were $9,000,000. In its December 31, 2019
balance sheet, what amount should Jamin report as allowance for uncollectible
accounts?
a. $115,000 c. $180,000
b. $245,000 d. $440,000

4. For the year ended December 31, 2016, Abel Co. estimated its allowance for
uncollectible accounts using the year end aging of accounts receivable. The
following data are available:
Allowance for uncollectible accounts, Jan 1, 2016 63,000
Provision for uncollectible accounts during 2016
(2% on credit sales of 3,000,000) 60,000
Uncollectible accounts written off, Nov 30, 2016 69,000
Estimated uncollectible accounts per aging, Dec 31, 2016 78,000
What should be the total uncollectible accounts expense for 2016 after year end
adjustments?
a. 69,000 b. 72,000 c.78,000 d. 84,000

5. On May 31, 2016, Peter Co had an unadjusted credit balance of 16,000 in its
allowance for uncollectible accounts. An analysis of Peter’s trade accounts
receivable at that date revealed the following:
Age Amount Estimated Uncollectible
0-30 days 960,000 5%
31-60 days 64,000 10%
Over 60 days 32,000 22,400
What amount should Peter report as allowance for uncollectible accounts in its May
31, 2016 balance sheet?
a. 48,000 b. 60,800 c. 64,000 d. 76,800

II. Comprehensive problem

At December 31, 2019, end of the annual reporting period, the accounts of Berks
Company showed the following:
a. Sales revenue for 2019, P180,000 of which one-sixth was on credit.
b. Allowance for doubtful accounts, balance January 1, 2019, P900 credit.
c. Accounts receivable, balance December 31, 2019 (prior to any write-offs of

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

uncollectibles accounts during 2019), P18,050.

d. Uncollectible accounts to be written off, December 31, 2019, P1,050.
e. Aging schedule at December 31, 2019, showing the following breakdown of
total accounts receivable:
Status Amount
Not past due P10,000
Past due 1-60 days 4,000
Past due over 60 days 3,000

Required:
1. Give the 2019 to write off the uncollectible accounts
2. Give the 2019 adjusting entry to record bad debt expense for each of the
following independent assumptions concerning bad debt loss rates:
a. On credit sales, 1.5%
b. On total receivables at year-end, 2.5%
c. On aging schedule: not past due, 0.5%; past due 1-60 days, 1%; and past
due over 60 days, 8%.
3. Show what would be reported on the 2019 balance sheet relating to accounts
receivable for each assumption.

In a Nutshell
Write atleast five important lessons that you have learned in this topic.

1. ______________________________________________________________
______________________________________________________________
______________________________________________________________

2. ______________________________________________________________
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______________________________________________________________

3. ______________________________________________________________
______________________________________________________________
______________________________________________________________

4. ______________________________________________________________
______________________________________________________________
______________________________________________________________

5. ______________________________________________________________
______________________________________________________________
______________________________________________________________

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Q&A List
Do you have any question for clarification? Write them here.

Questions/Issues Answers

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5.

Keywords
Doubtful accounts
Percent of sale
Percent of accounts receivable
Aging of accounts receivable

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