ESTIMATION OF DOUBTFUL

ACCOUNTS
Doubtful Account
A doubtful account or doubtful debt is an account receivable that
might become a bad debt at some point in the future. 
Methods of Estimating Doubtful Accounts

1. Aging the accounts receivable or “statement of

financial approach”
2. Percent of accounts receivable or also statement
of financial position approach
3. Percent of sales or “income statement approach”
This method has the advantage of presenting fairly the accounts
receivable in the statement of financial position at net receivable.

However, aging method violates the matching process.

Required allowance: 50,000
Less: Allow. Bal before
adj. 10,000
Doubtful accounts 40,000

Doubtful accounts 40,000

Allowance for doubtful 40,000
accounts
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.

Rate used is determined from past experience of the entity.

Has the advantage of presenting the accounts receivable at estimated net

realizable value.

However, this approach violates the principle of matching bad debt loss
against the sales revenue.
Required allowance (2,000,000 x 3% ) 60,000
Less: Credit bal. in allowance 10,000
Doubtful account 50,000

Doubtful accounts 50,000

Allowance for doubtful accounts 50,000
Percent of Sales

The amount of sales for the year is multiplied by a certain rate to get
the doubtful account expense.

When the percent of sales method is used in computing doubtful

accounts, proper matching of cost against revenue is achieved.

However, this method may not show accounts receivable at estimated

realizable value because the allowance for doubtful accounts may prove
excessive or inadequate.
5,000,000 – 50,000 = 5,000,000 x 1% = 50,000

Doubtful Accounts 50,000

Allowance for doubtful accounts 50,000
a. Credit sales (5,000,000 x 75%) 3,750,000
DA (3,750,000 x 2%) 75,000

Doubtful accounts 75,000

Allowance for doubtful accounts 75,000

b. Doubtful accounts (5,000,000 x 1%) 50,000

Allowance for doubtful accounts 50,000

c. Required allowance 80,000

Less: Credit bal. of allow. 20,000
DA 60,000

Doubtful accounts 60,000

Allowance for doubtful accounts 60,000

d. Required allowance (500,000 x 10%) 50,000 Doubtful accounts 30,000

Less: Credit bal. of allow. 20,000 Allow. For doubtful accts. 30,000
DA 30,000