ESTIMATION OF

DOUBTFUL ACCOUNTS
Methods of estimating doubtful accounts
There are 3 methods of estimating doubtful accounts, namely:
• Aging the accounts receivable or “statement of financial position
approach”
• Percent of accounts receivable or also statement of financial position
approach
• Percent of sales or “income statement approach”
Aging of accounts receivable
The aging of accounts receivable involves an analysis where the accounts are
classified into not due or past due.
• Not due
• 1 to 30 days past due
• 31 to 60 days past due
• 61 to 90 days past due
• 91 to 120 days past due
• 121 to 180 days past due
• 181 to 365 days past due
• More than 1 year past due
Aging of accounts receivable
• 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.
• The major argument for the use of this method is the more accurate and
scientific computation of the allowance for doubtful accounts.
• This method has the advantage of presenting fairly the accounts
receivable in the statement of financial position at net realizable value.
The objection to the aging method is that it violates the matching process.
• Moreover, this method could become prohibitively time consuming if a
large number of accounts are involved.
Illustration
• The ff. data are summarized in aging the accounts receivable at the end  The amount computed by aging of accounts
of the period:  receivable represents the required allowance for
A B AXB doubtful accounts at the end of the period.
Balance Experience Required Thus, if the allowance for doubtful accounts has a
Rate Allowance credit balance of P10,000 before adjustment, the
• Not due 500,000 1%5,000 doubtful accounts expense is determined as follows:
• 1-30 days past due 300,000 2%6,000 Required allowance 50,000
• 31-60 days past due 200,000 4%8,000 Less: Allowance balance before adjustment 10,000
• 61-90 days past due 100,000 7%7,000 Doubtful accounts expense 40,000
• 91-180 days past due 50,000 10% 5,000
 
• 181-365 days past due 30,000 30% 10,000
JE:
• More than one year 20,000 50% 10,000
1,200,000 50,000 Doubtful accounts 40,000
Allowance for doubtful accounts 40,000
 
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. However, the application of this approach violates the
principle of matching bad debt loss against the sales revenue.
Moreover, the loss experience rate may be difficult to obtain and may
not be reliable.
Illustration
• The balance of accounts receivable is P2,000,000 and the credit balance in the
allowance for doubtful accounts is P10,000. Doubtful accounts are estimated
at 3% of accounts receivable.
JE
Doubtful Accounts 50,000
Allowance for doubtful accounts 50,000
 
Required allowance (3% x 2,000,000) 60,000
Less: Credit balance in allowance 10,000
Doubtful accounts expense 50,000
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 prior years.
Illustration
The following accounts are gathered from the ledger:
• Accounts receivable 1,000,000
• Sales 5,050,000
• Sales return 50,000
• Allowance for doubtful accounts 20,000
 
If doubtful accounts are estimated at 1% of net sales, the doubtful accounts expense is
P50,000 (1% of P5,000,000) and recorded as follows:
 
Doubtful accounts 50,000
Allowance for doubtful accounts 50,000
• If this method is used, the resulting amount of the computation is
already the amount of the doubtful accounts expense and not the
required allowance, in contradistinction with the aging method and
the percent of accounts receivable method.
• The allowance balance before adjustment is ignored in determining
the doubtful accounts expense to be recorded.
• However, the allowance for doubtful accounts should have an
adjusted balance of P70,000, the beginning allowance of P20,000 plus
the adjustment of P50,000.
Correction in allowance for doubtful
accounts
• The percentage of sales method of estimating doubtful accounts has
the disadvantage of the allowance for doubtful accounts being
inadequate or excessive. The correction is to be reported in the
income statement either as an addition to or subtraction from
doubtful accounts expense.
• The reason is that the correction is the natural result of a change in
estimate. Changes in estimate are treated currently and prospectively,
if necessary.
An inadequate allowance is adjusted as follows:
Doubtful accounts xx
Allowance for doubtful accounts xx

An excessive allowance is recorded as follows:

Allowance for doubtful accounts xx
Doubtful accounts xx
Pro b le m 5-1

a . Ba d d e b ts Exp e nse 75,000

Allo wa nc e fo r b a d d e b ts 75,000

b . Ba d d e b ts Exp e nse 50,000

Allo wa nc e fo r b a d d e b ts 50,000

c . Ba d d e b ts Exp e nse 60,000

Allo wa nc e fo r b a d d e b ts 60,000

d . Ba d d e b ts Exp e nse 30,000

Allo wa nc e fo r b a d d e b ts 30,000
Pro b le m 5-3

1. C a sh 800,000
Ac c o unts re c e iva b le 7,200,000
Sa le s 8,000,000
2. C a sh 684,000

Sa le s d isc o unt 36,000

Ac c o unts re c e iva b le 720,000

3. C a sh 5,940,000
Ac c o unts re c e iva b le 5,940,000
4. Sa le s d isc o unt 10,000

Allo wa nc e fo r sa le s d isc o unt 10,000

5. Sa le s re turn 80,000
Ac c o unts re c e iva b le 80,000
6. Allo wa nc e fo r Ba d d e b ts 60,000
Ac c o unts Re c e iva b le 60,000
7. Ac c o unts re c e iva b le 10,000
Allo wa nc e fo r Ba d d e b ts 10,000

C a sh 10,000

Ac c o unts Re c e iva b le 10,000

• Problem 5-6
1. 280,000
2. 345,000
3. Bad debt expense 345,000
Allowance for bad debts 345,000
4. 2,940,000