Estimation of Doubtful - This method has the advantage of presenting the

accounts receivable in the statement of financial

position at net realizable value
Accounts - Violates the principle of matching bad debt loss
against the sales revenue
METHODS OF ESTIMATING DOUBTFUL
ACCOUNTS

A.    STATEMENT OF FINANCIAL
APPROACH
- Under this approach, the amount computed is
the required allowance for doubtful accounts at the
end of the period
- There are two methods under this approach:

1.    Aging of accounts receivable method

2.    Percentage of accounts receivable method

B.    INCOME STATEMENT APPROACH

- Under this approach, the amount computed is
the amount of doubtful account expense for that
period

3.    Percentage of sales method

Aging Of Accounts Receivable

- Involves analysis where the accounts are classified
into not due or past due
- the credit terms will determine if the account is
already past due
- Past due
- refers to the period beyond the maximum credit
term

Example: 50 days old account with credit term of n/30 is

already 20 days past due.

 Allowance for doubtful account is determined by

multiplying the total of each classification by the
rate or percentage of loss experienced by 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
 It violates the matching process
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
Percentage of sales
Doubtful account expense = Sales for the year x rate%
- Rate may be applied on credit sales or total sales
- This approach may prove unsatisfactory when
there is considerable fluctuation in the proportion
of cash and credit sales periodically.
- Proper matching of cost against revenue is
achieved
 Bad debt loss is directly related to sales and
reported in the year of sale

Allowance for doubtful account = Accounts receivable x rate%
- Rate used is usually determined from past
experience of the entity which may be difficult to
obtain and may not be reliable
- Accounts receivable may not be shown at
estimated realizable value because the allowance
for doubtful accounts may prove excessive or
inadequate
 the income of the current period. The entry is as
follows
Allowance for Doubtful Accounts Xx
Doubtful Accounts Xx
Miscellaneous Income xx

Debit balance in allowance account

- There are instances that it may have a debit balance
because it may be the policy of the entity to adjust
the allowance at the end of the period and record
accounts written off during the year.
- This does not indicate that debit balance in the
allowance is inadequate
- In this case, the charged to allowance account
CORRECTION IN ALLOWANCE FOR simply predates the recording of doubtful accounts.
DOUBTFUL ACCOUNTS The debit balance should be considered when
adjustments are made at the end of the period
- Correction is a natural result of a change in
estimate
- Correction is to be reported in the income
statement either as an addition to or subtraction
from doubtful accounts expense
- Changes in estimate are treated currently and
prospectively

a. Inadequate allowance is adjusted as follows:

Doubtful Accounts Xx
Allowance for Doubtful Accounts Xx

b.    Excessive allowance is adjusted as follows:

Allowance for Doubtful Accounts Xx

Doubtful Accounts Xx

 When discrepancy is more than the debit balance in

the doubtful accounts expense account, the
difference will be included in the determination of