ALLOWANCE FOR DOUBTFUL ACCOUNTS

TOPIC OUTLINE
 Accounting for Bad debts (Allowance method versus Direct Write off Method)
 Estimation of Bad Debts/Doubtful Accounts
 Illustrative Problems

ALLOWANCE FOR DOUBTFUL ACCOUNTS

 Also called as:
1. Allowance for Bad Debts
2. Allowance for Uncollectible Accounts
3. Allowance for probable losses on receivables
4. Loss allowance
 Based on estimate

2 METHODS
1. Allowance Method
 Recognized bad debts when collectability becomes doubtful or questionable
 When it becomes certain that the account is uncollectible or worthless, the accounts
are written off.
 When accounts previously written off are subsequently recovered, the previous entry
is reversed.
 Acceptable by the Standard/ In accordance with PFRS
2. Direct Write-off Method
 Written off when the accounts are deemed worthless
 Not acceptable by the standard but in favor for taxation purposes.
 When accounts previously written off are subsequently recovered, the previous entry
is reversed.

DIRECT WRITE-OFF
ALLOWANCE METHOD DR CR DR CR
METHOD
1. Accounts worth P10,000 are considered doubtful of collection
Bad debts expense P10,000 NO JOURNAL ENTRY
Allowance for bad debts P10,000
2. The said account is subsequently discovered to be worthless or uncollectible
Allowance for bad debts P10,000 Bad debts expense P10,000
Accounts receivable P10,000 Accounts receivable P10,000
3. The said account previously written off are unexpectedly recovered or collected
Accounts receivable P10,000 Accounts receivable P10,000
Allowance for bad debts P10,000 Bad debts expense P10,000

Cash P10,000 Cash P10,000

Accounts receivable P10,000 Accounts receivable P10,000
T-ACCOUNTS

ALLOWANCE FOR DOUBTFUL

ACCOUNTS
Write-off xxx Beginning xxx
Recovery xxx
Bad debt expense xxx
Ending xxx

PRESENTATION IN THE FINANCIAL STATEMENTS

1. BAD DEBTS EXPENSE
 Presented in the Income Statement/Profit or Loss Portion of the Statement of
Comprehensive Income.
 Can either be part of:
1. Administrative Expense (If the problem is silent, normal presentation)
2. Selling Expense/Distribution Cost (if granting of credit and collection of A/R is
under the supervision of Sales Manager)

2. ALLOWANCE FOR BAD DEBTS

Presented in the Statement of Financial Position/Balance Sheet as Contra-asset account

(deduction to Accounts receivable)

Accounts receivable PXX

Less: Allowance for Bad Debts XX
Net Realizable Value PXX

HOW TO COMPUTE OR ESTIMATE THE BAD DEBTS?

3 METHOD OF ESTIMATING BAD DEBTS

1. Aging of Receivables (Statement of Financial Position Approach)

2. Percent of Accounts Receivable (Statement of Financial Position Approach)
3. Percent of Sales (Income Statement Approach)
AGING OF ACCOUNTS RECEIVABLE

 Involves analysis of NOT DUE or PAST DUE accounts receivables

 When is the account Past Due? If it is beyond the credit period.
 The amount computed by aging of accounts receivable represents the required allowance
for doubtful accounts at the end of the period.
ADVANTAGE
1. More accurate and scientific computation/Detailed
DISADVANTAGE
1. Violates the matching process
2. Time consuming to do (if the company has large number of A/R)

ILLUSTRATION

1. The following data are summarized in aging the accounts receivable at the end of the
period:

(a) (b) (a x b)
Balance Experience rate Required 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
31-90 days past due 100,000 7% 7,000
91-180 days past due 50,000 10% 5,000
181-365 days past due 30,000 30% 9,000
More than one year 20,000 50% 10,000
1,200,000 50,000

2. ABC Co. has the following information:

(a) (b)
DAYS OUTSTANDING
Balance % of uncollectible
0 - 60 120,000 1%
61 - 120 90,000 2%
Over 120 100,000 6%
TOTAL RECEIVABLES 310,000

During the year, ABC Co. wrote off P7,000 receivables and recovered P4,000 that had been
written off prior years. The allowance for doubtful accounts has a beginning balance of
P2,000.00.

Requirements:

a. Compute for (a) doubtful accounts expense for the year (b) net realizable value of
accounts receivable
PERCENT OF ACCOUNTS RECEIVABLE

 Multiply a % by the open accounts receivable at the end of the period to get the
REQUIRED Allowance for Doubtful account balance.
 The % or rate is usually determined from past experiences of the Entity.
 Advantage - simply to apply
 Disadvantage - violates the matching of bad debt loss against sales revenue

ILLUSTRATION

1. The balance of A/R is P2,000,000 and the credit balance in the allowance for doubtful
accounts is P10,000. Doubtful accounts are estimated at 3% of A/R.

2. ABC Co. has the following information on December 31, 2021 before any year-end
adjustments

Accounts Receivable, Jan. 1 80,000

Net credit sales 270,000
Collections from customer (excluding recoveries 140,000
Allowance for doubtful accounts, Jan. 1 10,000
Write-offs 5,000
Recoveries 1,000
Percentage of receivables 5%

Requirements: Compute for the following:

1. Bad debts expense
2. Net realizable value of accounts receivable
PERCENT OF SALES
 Multiply a percent (%) by the Sales (credit sales or total sales)
 Bad debt expense is computed
ADVANTAGE
1. Simply to apply
2. Matching of cost against revenue is achieved
Disadvantage
1. Unsatisfactory when there is a consideration fluctuation in the proportion of cash and
credit sales periodically.

ILLUSTRATION

1. The following information are presented in the ledger: A/R - P1,000,000; Sales -
P5,050,000; Sales return - P50,000 and Allowance for bad debts - P20,000. Doubtful
account is determined to be 1% of net sales.

2. ABC Co. has the following information on December 31, 20x1 before any year-end
adjustments.

Allowance for doubtful accounts, Jan. 1 8,000

Write-offs 5,000
Recoveries 1,000
Sales (including cash sales of P100,000) 600,000
Sales returns and discounts (including P1,000 sales returns on cash sales) 6,000
Accounts receivable, Dec. 31 150,000
Percentage of credit sales 2%

Requirements: Compute for the following:

3. Bad debts expense
4. Allowance for doubtful accounts
5. Net realizable value of accounts receivable