Accounts Receivable Estimation for doubtful accounts, Lecture notes of Accounting

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ESTIMATION OF

DOUBTFUL ACCOUNTS

OBJECTIVES

• (^) Identify the methods of estimating doubtful accounts expense
• (^) Understand the argument for and against the aging of accounts receivable
• (^) Understand the argument for and against the percentage of accounts receivable method
• (^) Understand the argument for and against the percentage of sales method
• (^) To determine the DAE and ADA under the three methods

AGING OF ACCOUNTS RECEIVABLE

• (^) The amount computed under aging the

accounts receivable is the required

allowance for doubtful accounts at

the end of the period.

Bad debt expense 40,

Allowance 40,

AGING OF ACCOUNTS RECEIVABLE

EXAMPLE

Balance % uncollectible Not due 1,000,000 2% 0-30 days 350,000 5% 31-60 days past due 100,000 15% 61-90 days past due 50,000 20% 91-120 days past due 30,000 50% 1,530, The allowance for doubtful accounts before adjustment is P50,000. Compute for the Allowance for Doubtful accounts and Doubtful accounts expense.

PERCENT OF RECEIVABLES METHOD

1. Compute the estimate of the **Allowance for Doubtful Accounts.

2. Bad Debts Expense is computed as:** Year-end Accounts Receivable (^) × Bad Debt % Total Estimated Bad Debts Expense - Previous Balance in Allowance Account = Current Bad Debts Expense Year-end Accounts Receivable (^) × Bad Debt %

EXAMPLE

ABC Co. has an unadjusted balance of allowance for doubtful accounts before adjustment of P82,300. The accounts receivable is P2,500, at the end of the period. Previous periods have shown that 8% of the accounts receivable are uncollectible. Compute for the Allowance for Doubtful accounts and Doubtful accounts expense.

PERCENT OF SALES METHOD

Bad debts expense is computed as follows: Current Period Sales × Bad Debt % = Estimated Bad Debts Expense P

Current Period Sales

× Bad Debt %

= Estimated Bad Debts Expense

EXAMPLE

ABC Co. has an unadjusted balance of allowance for doubtful accounts before adjustment of P82,300. The accounts receivable is P2,500,000 at the end of the period. Current month sales is P5,000,000. It is believed that 2% is uncollectible. Compute for the Allowance for Doubtful accounts and Doubtful accounts expense under the percent of sales method.

EXAMPLE

ABC Co. has an unadjusted balance of allowance for doubtful accounts before adjustment of P82,300. The accounts receivable is P2,500,000 at the end of the period. Current month sales is P5,000,000. It is believed that 2% is uncollectible. Compute for the Allowance for Doubtful accounts and Doubtful accounts expense under the percent of sales method. Allowance for Doubtful Accounts 82,300 Beg. Bal 100,000 DAE (5M X 2%) 182,300 ADA

CORRECTION IN ALLOWANCE FOR DOUBTFUL ACCOUNTS

• (^) Percent of sales method has the disadvantage of creating an allowance that is excessive or inadequate
• (^) This can be checked through aging of the AR “correction is an adjustment to the doubtful accounts expense recognized in the income statement” If inadequate, Doubtful Accounts Expense Allowance for Doubtful Accounts If excessive, Allowance for Doubtful Accounts Doubtful Accounts Expense

SAMPLE PROBLEM

ABC company uses the percent of sales method in recognizing the doubtful accounts per month. During the month of December, the company was able to generate P10,000,000 credit sales. The bad debt percentage used by the company for recording the expense is .6% of credit sales. The beginning balance of Allowance for doubtful account is P25,000. At the closing of the month, the accountant believed that such estimate for this month’s DAE is not accurate. Thus, an aging of AR was made and showed an amount of P85,. Prepare the necessary adjustment to correct the

DEBIT BALANCE IN ALLOWANCE ACCOUNT

• (^) Allowance account normally has a

credit balance

• (^) Debit balances occurs if the company

will adjust the allowance and record

accounts written off during the year

SAMPLE PROBLEM

At the beginning of June 2020, the company has a credit balance of P32,000 in its allowance for doubtful accounts. During the month, an account amounting to P64,000 was written off. The company prepared an entry recognizing doubtful accounts expense in the amount of P30,000. At the end of the month, the company discovered that the correct amount that should be presented for ADA is P26,000. What is the journal entry to adjust both the DAE and ADA for the month of June.Allowance for Doubtful Accounts 32,000 Beg. Bal Write-off 64,000 30,000 DAE recognized 28,000 ADJUSTMENT 26,000 Required allowance Doubtful Accounts 28,000. Allow. For Doubtful Accounts 28,000.