ACCOUNTING FOR DOUBTFUL

ACCOUNTS

LEARNING OBJECTIVES
At the end of the session, you should be
able to:
1. Give the two methods of accounting

for doubtful accounts.

2. Give the distinctions between the
two methods.
3. Give the two methods of estimating
doubtful accounts under the
allowance method.
4. Give the adjusting entry for doubtful
accounts.

UNCOLLECTIBLE ACCOUNTS

Refers to losses

sustained because the

business is unable to
collect all of its
receivables
Also referred to as

REASONS

Financial reverses

suffered by the customers

Poor credit selection
processes
Poor or inadequate
collection services

2 METHODS OF RECORDING
UNCOLLECTIBLES
Direct Write Off

-No entry is made until a specific account

has definitely been established as

uncollectible
-The bad debts is recorded in the year it is
determined to be uncollectible
-Facts, not estimates are recorded
Simple and convenient to apply
Does not match costs with revenues
Does not state receivables at estimated
realizable value

2 METHODS- continued
Allowance method

An estimate is made of the expected

uncollectible accounts every end of the

period
Proper matching of expenses and
revenues
Results in proper carrying value of
receivables
Estimates are based from past
experiences and market condition

ALLOWANCE METHOD ESTIMATION METHODS

Percentage of receivables
Based on a relationship between accounts

receivable and bad debts

Provides a reasonable accurate estimate of the
receivables realizable value
Affected by balance in the allowance account
Bad debts expense is computed as follows:
Accounts receivable
Bad debt rate
Required allowance
Less: Previous allowance xxx
Bad debts expense

xxx
%
xxx
xxx

ESTIMATION METHODS continued

Aging of accounts receivable

Classifies each receivable

according to its age

The longer the account is past
due, the greater the likelihood that
it will not be collected in full
Applies a different percentage
based on past experience to the
various age categories

PRO-FORMA ADJUSTING
ENTRIES

-Allowance method
Bad debts expense
xxx
Allowance for bad
debts xxx

Illustration
Assume the following account balances

at year-end:
Account Receivable (Dr)
P100,000
Allowance for Doubtful Accounts (Cr)
P500
The company estimates that 2% of
outstanding Account Receivable is
doubtful of collection.
Dec 31, 2013 Prepare the necessary

Classroom Exercises- Doubtful

Accounts
The ff. data were taken from the records of a firm at
year-end before adjustments were booked.
Accounts Receivable
P40,500
Allowance for doubtful accounts (Cr)
500
Give the adjustment for doubtful accounts under each of
the ff. independent cases:
1. 3% of outstanding accounts receivable are
estimated to be doubtful.
2. The Allowance account is increased by 5% of
outstanding accounts receivable.
3. The Allowance account is increased to 5% of
outstanding customers accounts.