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Chapter 5 Estimation of Doubtful Accounts

This document discusses three common methods for estimating doubtful accounts expense: [1] the aging of accounts receivable method, which analyzes past due accounts by age bracket; [2] the percentage of accounts receivable method, which calculates doubtful accounts as a percentage of total receivables; and [3] the percentage of sales method, which calculates doubtful accounts as a percentage of net sales. For each method, examples are provided to illustrate how to calculate the doubtful accounts expense adjustment and corresponding journal entry. The document aims to teach the learner to identify and apply these three methods of estimating doubtful accounts.

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1K views

Chapter 5 Estimation of Doubtful Accounts

This document discusses three common methods for estimating doubtful accounts expense: [1] the aging of accounts receivable method, which analyzes past due accounts by age bracket; [2] the percentage of accounts receivable method, which calculates doubtful accounts as a percentage of total receivables; and [3] the percentage of sales method, which calculates doubtful accounts as a percentage of net sales. For each method, examples are provided to illustrate how to calculate the doubtful accounts expense adjustment and corresponding journal entry. The document aims to teach the learner to identify and apply these three methods of estimating doubtful accounts.

Uploaded by

Angelie Laxa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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(Intermediate Accounting 1A)

LECTURE AID

2019
Chapter 5 ESTIMATION OF
DOUBTFUL ACCOUNTS

Learning Objectives

• Identify the methods of estimating


doubtful accounts expense.
• Determine the doubtful accounts
expense and the allowance for
doubtful accounts under aging,
percentage of accounts receivable and
percentage of sales method.
Methods of Estimating doubtful accounts

• Aging of A/R (Statement of financial position approach)

• Percent of A/R (Statement of financial position approach)

• Percent of sales (Income statement approach)


Aging of Account Receivable
Aging of A/R – involves an analysis where the accounts are classified
into NOT DUE or PAST DUE

✓ Not due ✓ 91 to 120 days past due


✓ 1 to 30 days past due ✓ 121 to 180 days past due
✓ 31 to 60 days past due ✓ 181 to 365 days past due
✓ 61 to 90 days past due ✓ More than 1 year past due
NOTE:
Required allowance = total of each classification x (% of loss experienced by entity)

This method has the advantage of presenting fairly the accounts receivable in the statement of financial
position at NRV
When is an account past due?

The credit terms will determine whether an account is past due.


Example:
If the credit terms were 2/10, n/30 and the account is 45 days old, it is
considered to be 15 days past due,

Note:
Past due refers to the period beyond the maximum credit term. In the
example, the credit term or credit period is 30 days,
Illustration:

If the allowance for doubtful accounts has a credit balance of P10,000


before adjustment, what is the doubtful account expense?
Solution:

Required allowance 50, 000


Less: Allowance balance before adjustment 10, 000
Doubtful accounts expense 40, 000

Journal entry:
Doubtful accounts 40, 000
Allowance for doubtful accounts 40, 000
Percent of Accounts receivable

Note:
Required allowance balance = % x Accounts receivable, end

• This procedure has the advantage of presenting the accounts


receivable at estimated net realizable value
• The rate used is usually determined from past experiences of the
entity
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.

Required allowance (3%x2M) 60, 000


Less: Credit balance allowance 10, 000
Doubtful accounts expense 50, 000

What is your journal entry?


Doubtful accounts 50, 000
Allowance for doubtful accounts 50, 000
Percent of sales

Note:
Doubtful account expense = amount of sales for the year x %

Rate
• is computed by dividing the bad debt expense losses in prior years by the
charge sales of prior years.
• Is multiplied by the current year’s charge sales to arrive at the doubtful
account expense
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 the doubtful accounts are estimated at 1% of net sales, the doubtful accounts
expense is P50, 000.

Doubtful accounts 50, 000


Allowance for doubtful accounts 50, 000

Allowance for doubtful accounts should have an adjusted balance of


P70, 000
END

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