ESTIMATION OF DOUBTFUL ACCOUNTS

Methods of estimations

I. Aging the AR or statement of financial position approach

- Not due or past due classification
- Classified into:
1. Not due
2. 1-30 days past due
3. 31-60 days past due
4. 61-90 days past due
5. 91-120 days past due
6. 121-180 days past due
7. 181-365 days past due
8. More than 1 year past due

a. Formula:

Required allowance for DA = total of each classification x % of loss experienced for each
category

Required allowance for DA xx

Less: Allowance for DA balance before adj. (xx)

Doubtful accounts expense xx

b. Journal entry

Doubtful accounts xx
Allowance for DA xx

II. Percent of AR or statement of financial position approach

- Using loss experience rate from past experience of entity

a. Formula

Required allowance for DA = accounts receivable x loss experience rate %

Required allowance xx

Less: Credit balance in allowance for DA (xx)

DA expense xx

b. Journal entry

DA xx
Allowance for DA xx

III. Percent of Sales or income statement approach

- Annual sales multiples by rate
- Conforms to matching rule of cost against revenue
- No required allowance (vs aging method and % of AR method)
- Credit balance of allowance for DA is ignored in computing DA expense

i. Formula

Rate = bad debt losses PRIOR YEARS/ charge sales PRIOR YEARS (or current

Doubtful accounts expense = rate x CURRENT YEAR charge sales

ii. Journal entry

Doubtful accounts xx

Allowance for DA xx

Note: this method has a disadvantage of the allowance being inadequate or

excessive

a. If inadequate

Doubtful accounts xx
Allowance for DA xx

b. If excessive

Allowance for DA xx
Doubtful accounts xx

Note: If the debit balance of DA is less than the discrepancy created by

an excessive allowance, whereby:
DA 50,000
Excessive correction amount 80,000

Followed by the journal entry:

Allowance for DA 80,000

DA 50,000

Misc. income 20,000 (subra sa allowance)

It will result to the ff. computations:

DA balance 50,000

DA adjustment (discrepancy) (80,000)

Credit balance – DA 20,000

Thus, the outcome is a credit balance in the DA expense.

Remedy: difference is included in computing current income.

Note: A debit balance in allowance for DA does NOT ALWAYS
indicate inadequacy.

For instance: entity policy requires adjustments for A-DA at end of

year but writes off accounts during the year, whereby:

A-DA credit balance (Jan. 1) 10,000

During the year, entity writes off accounts: (Sept. 15)

A-DA 30,000

Accounts receivable 30,000

This results to a debit balance before adjustment at end of year:

A-DA (Jan. 1) 10,000

A-DA (Sept. 15) (30,000)

Debit balance A-DA 20,000

At end of year, entity records adjustments w/ required allowance

(50,000). To determine DA expense:

Required allowance for DA 50,000

Add: Debit balance A-DA 20,000

DA expense 70,000

Journal entry:

DA 70,000

A-DA 70,000

This results to an updated credit balance for the current year sales:

A-DA (Jan. 1) 10,000

A-DA (Sept. 15) (30,000)

Debit balance A-DA 20,000

A-DA (Dec.31) 70,000

Credit balance A-DA 50,000

It reflects the required allowance given for DA.