Acctg

Intermediate
Accounting 1
Acctg.

Allowance for Bad

Debts / Estimated
Doubtful Accounts
Prof. Ernie D. Tano, CPA, MBA
Acctg.

Methods of Estimating Doubtful Accounts

1. Aging the Accounts Receivable or “statement of

financial position approach”
2. Percent of Accounts Receivable or also
“statement of financial position approach”

3. Percent of Sales or “income statement

approach”
Acctg.

Methods of Estimating Doubtful Accounts

Treatment of Computed Amount

Methods Computed Amount Category of Account
Aging of AR Ending balance of SFP as contra-asset
allowance for doubtful account
account
% of AR Ending balance of SFP as contra-asset
allowance for doubtful account
account
% of Sales Doubtful account SCI as operating
expense expense
Acctg.

Methods of Estimating Doubtful Accounts

1. Aging the Accounts Receivable
- Analysis classifying accounts into not due or past due
a. Not due e. 91 to 120 days past due
b. 1 to 30 days past due f. 121 to 180 days past due
c. 31 to 60 days past due g. 181 to 365 days past due
d. 61 to 90 days past due h. More than 1 year past due

- The allowance is then determined by multiplying the total of each classification

by the rate or percent of loss experienced by the entity for each category

- This method has the advantage of presenting fairly the accounts receivable in the
statement of financial position at net realizable value
Acctg.

Methods of Estimating Doubtful Accounts

1. Aging the Accounts Receivable - Illustration
Erza Enterprises has the following data as of Dec. 31, 200x
Sales P2,000,000
Accounts receivable 600,000
Allowance for doubtful accounts 35,000

Assume that the ages of A/R & percentage of collection are as follows:
Collectible
Ages of AR Balance Percentage
Not due 200,000 98%
1-60 days 150,000 95%
61-120 days 100,000 90%
121-180 days 75,000 88%
180-365 days 50,000 70%
More than 365 days 25,000 60%
Acctg.

Methods of Estimating Doubtful Accounts

1. Aging the Accounts Receivable - Illustration
The required allowance for doubtful accounts is computed as follows:
Collectible Uncollectible Required 100% - 98%
Ages of AR Balance Percentage Percentage Allowance

P200,000 x 2%
Not due 200,000 98%  2%   4,000

1-60 days 150,000 95%  5%   7,500

61-120 days 100,000 90%  10%   10,000

121-180 days 75,000 88%  12%   9,000

180-365 days 50,000 70%   
30% 15,000
More than 365 days 25,000 60%    Required
40% 10,000 allowance of
 
        doubtful accounts
Total 600,000 55,000
Acctg.

Methods of Estimating Doubtful Accounts

1. Aging the Accounts Receivable - Illustration
Sales P2,000,000 Required Allowance P55,000
Accounts receivable 600,000 Less: Recorded Allowance 35,000
Allowance for doubtful accounts 35,000 Increase in Allowance 20,000

The adjusting entry would be:

Allowance for Bad Debts
             
  GENERAL JOURNAL  
  Date Descriptions Debit Credit   35,000
    Bad Debts Expense 20,000  
    Allowance for Bad Debts   20,000   20,000
       
             
55,000
Acctg.

Methods of Estimating Doubtful Accounts

2. Percent of Accounts Receivable
- A certain rate is multiplied by the open accounts at the end of the
period in order to get the required allowance balance.

- The rate used is usually determined from past experience of the entity.

- This procedure has the advantage of presenting the accounts receivable at

estimated net realizable value. The approach is also simple to apply.
Acctg.

Methods of Estimating Doubtful Accounts

2. Percent of Accounts Receivable - illustration
Erza Enterprises has the following data as of Dec. 31, 200x
Sales P2,000,000
Accounts receivable 600,000
Allowance for doubtful accounts 35,000

Assume that 10% of AR is deemed uncollectible

Accounts receivable, ending P600,000

Multiply by % of uncollectible accounts 10%
Required allowance for bad debts/doubtful accounts P60,000
Acctg.

Methods of Estimating Doubtful Accounts

2. Percent of Accounts Receivable - Illustration
Sales P2,000,000 Required Allowance P60,000
Accounts receivable 600,000 Less: Recorded Allowance 35,000
Allowance for doubtful accounts 35,000 Increase in Allowance 25,000

The adjusting entry would be:

Allowance for Bad Debts
             
  GENERAL JOURNAL  
  Date Descriptions Debit Credit   35,000
    Bad Debts Expense 25,000  
    Allowance for Bad Debts   25,000   25,000
       
             
60,000
Acctg.

Methods of Estimating Doubtful Accounts

3. Percent of Sales
- The amount of sales for the year is multiplied by a certain rate to get
the doubtful accounts expense. The rate may be applied on credit sales
or total sales

- Theoretically, the rate to be used is computed by dividing the bad debt

losses in prior years by the charge sales of priors years

- The rate thus obtained is multiplied by the current year’s total sales to
get the doubtful accounts expense.
Acctg.

Methods of Estimating Doubtful Accounts

3. Percent of Sales- illustration
Doubt Enterprises has the following data as of Dec. 31, 200x
Sales P2,000,000
Accounts receivable 600,000
Allowance for doubtful accounts 1,500

Assume that 1% of Sales are deemed uncollectible

Sales P2,000,000
Multiply by % of uncollectible accounts 1%
Estimated doubtful accounts P20,000
Acctg.

Methods of Estimating Doubtful Accounts

3. Percent of Sales- Illustration
Sales P2,000,000 Recorded allowance P1,500
Accounts receivable 600,000 Add; Est’d Doubtful Accts. 20,000
Allowance for doubtful accounts 1,500 Increase in Allowance 21,500

The adjusting entry would be:

Allowance for Bad Debts
             
  GENERAL JOURNAL  
  Date Descriptions Debit Credit   1,500
    Bad Debts Expense 20,000  
    Allowance for Bad Debts   20,000   20,000
       
             
21,500