Prepared by: Ms. HAZEL JADE E.

VILLAMAR
E-mail Address: _hazeljade.villamar@clsu2.edu.ph________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 2105 / Intermediate Accounting 1

Module 2
TOPIC 2 (ESTIMATION OF
DOUBTFUL ACCOUNTS)
Overview

This course covers the detailed discussion, appreciation, and application of

the Philippine Financial Reporting Standards (PFRS) on the assets, financial and
non-financial of a business enterprise. Emphasis is given on the interpretation and
application of the accounting standards on Financial Assets and their required
disclosures. The related internal control, ethical issues and management of assets
are also covered. Exposure to computerized system in receivables, inventory and
lapsing schedules is a requirement.

I. Objectives

At the end of the module, the following are expected:

A. Identify the proper presentation of receivables as either current or noncurrent
assets.

B. State the timing of recognition and measurement of trade and other

receivables.

C. Prepare amortization tables.

D. Account for impairment of receivables.

II. Learning Activities

ESTIMATION OF DOUBTFUL ACCOUNTS

Methods of estimating doubtful accounts

The three methods of estimating doubtful accounts are:

1. Aging the accounts receivable
2. Percent of accounts receivable
3. Percent of sales
Aging of accounts receivable and percent of accounts receivable involves an
account of financial position hence they are “statement of financial position approach”
and they will yield required allowance for accounts receivable. While percent of sales
involves an account of income statement hence it is an “income statement approach” and
the resulting amount would be the doubtful accounts expense.

Aging of Accounts Receivable

This method classifies accounts receivables into not due or past due. Each
classification is then multiplied by the rate or percent of loss that the entity has
experienced for every category. The resulting amount represents the required allowance
for doubtful accounts at the end of the period. In order to determine whether the
accounts are past due, the credit term is considered. For example, if the credit term is
2/10, n/30 and the account is already at 40 days then it is already 10 days past due. This
means that the maximum credit term has been exceeded by 10 days.
Illustration

Balance Experience rate Required

Allowance

Not due 600,000 2% 12,000

1-30 days past due 500,000 4% 20,000

31-60 days past due 400,000 12% 48,000

61-90 days past due 350,000 20% 70,000

91-180 days past due 240,000 21% 50,400

181-365 days past due 160,000 22% 35,200

More than one year 45,000 25% 11,250

Total 2,295,000 246,850

Percent of Accounts Receivable
This method is also a statement of financial position approach therefore the
resulting amount would be the required allowance for doubtful accounts. In this
method, a rate or percentage based on the past experience of the entity in its accounts
is multiplied by the open accounts.

Illustration
Angel Company reported the following account balance at year end:
Accounts Receivable 5,000,000
Allowance for Doubtful Accounts 20,000

Credit sales 3,050,000

Doubtful accounts are estimated at 2% of accounts receivable.

Journal Entry

Doubtful Accounts 80,000

Allowance for Doubtful Accounts 80,000

Required Allowance (5,000,000 * 2%) 100,000

Less: Credit balance of Allowance for doubtful accounts 20,000

Doubtful Accounts Expense 80,000

Percent of Sales

Doubtful accounts expense is obtained using this method by multiplying a rate to

either credit sales or total sales. This rate is calculated by dividing bad debt losses in the
prior year by the charge sales of the prior years.

Illustration
The following accounts are reflected in the ledger Andrew Co.
Accounts receivable 2,000,000
Allowance for doubtful accounts, Beginning 40,000

Sales 4,500,000

Sales return 50,000

Doubtful accounts expense is calculated as 2% of net sales

Sales 4,500,000

Sales return 50,000

Net Sales 4,450,000

Multiply by 2%

Doubtful Accounts Expense 89,000

Allowance for Doubtful accounts, Beginning 40,000

Doubtful Accounts Expense 89,000

Allowance for Doubtful Accounts, Ending 129,000

 ACCTG 2105 / Intermediate Accounting 1

References

Intermediate Accounting Volume 1, 2019 by Valiz, Peralta & Valix

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