ESTIMATING
DOUBTFUL ACCOUNTS
THREE METHODS OF ESTIMATING DOUBTFUL ACCOUNTS
1. PERCENTAGE OF NET CRET SALES
2. PERCENTAGE OF RECEIVABLES
3. AGING OF RECEIVABLES
PERCENTAGE OF CREDIT SALES
- Under this method, bad debt expense is computed:
Bad Debt Expense = Net Credit Sales x Percentage of credit sales
- The bad debt expense is computed without regard to the beginning balance of the allowance for doubtful accounts
and write-offs and recoveries recorded during the year.
- This method favors income statement.
Example: ABC Co. has the following information on December 31, 2021 before any year-end adjustments:
Allowance for doubtful accounts, Jan. 1 8,000
Write-offs 5,000
Recoveries 1,000
Sales (including cash sales of P100,000) 600,000
Sales returns and discounts (including P1,000 sales
Returns on cash sales) 6,000
Accounts Receivable, Dec. 31 150,000
Percentage on credit sales 2%
Requirement: Compute for the following
a. Bad debt expense\
b. Allowance for doubtful accounts on December 31
c. NRV of accounts receivable
Solution;
Total Sales 600,000
Less: Cash Sales 100,000
Credit Sales 500,000
Total Sales Return & discounts 6,000
Less: Sales returns on cash sales 1,000
Sales Returns & discounts on credit sales 5,000
Bad debt Expense = (500,000 – 5,000) x 2% = 9,900 (a)
Allowance for Doubtful Accounts
8,000 Beginning Balance
Write-off 9,900 Bad debt expense
5,000 1,000 Recoveries
13,900 Ending Balance (b)
Accounts Receivable
Credit Sales 5,000 Sales Returns & Discounts
500,000 345,000 collections (squeezed)
Ending Balance 150,000
Accounts Receivable. December 31 150,000
Less; Allowance for Doubtful Accounts 13,900
Net Realizable Value 136,100 (c)
PERCENTAGE OF RECEIVABLE
- Under this method, the required balance of allowance for doubtful accounts is computed by applying a
percentage on the ENDING balance of the receivables.
*note: Ending balance diay gamita Ninyo Ann and Derek, nasayop ko last time.
Example: ABC has the following information on December 31, 2021 before any year-end adjustments:
Accounts Receivables, Jan. 1 80,000
Net Credit Sales 270,000
Collections from customers (excluding recoveries) 140,000
Allowance for doubtful accounts, Jan. 1 10,000
Write-offs 5,000
Recoveries 1,000
` Percentage of Receivables 5%
Requirements: Compute for the following:
1. Bad debt expense
2. NRV
SOLUTION:
Accounts Receivable
Beginning Balance 80,000
Credit Sales 140,000 collections
270,000 5,000 write-offs
Ending Balance 205,000
Allowance for Doubtful Accounts = 205,000 x 5% = 10,250
Allowance for Doubtful Accounts
10,000 Beginning Balance
Write-off 4,250 Bad debt expense (squeezed) (a)
5,000 1,000 Recoveries
10,250 Ending Balance
NRV = 205,000 - 10,250 = 194,750 (b)
AGING OF RECEIVABLE
- This is a variation of the percentage of receivables method.
- Under this method, the required balance of allowance for doubtful accounts is computed by applying various
estimates percentages to the breakdown of the ending receivables according to ages.
Example: ABC Co. has the following information
Days Outstanding Receivable Balances % uncollectible
0 – 60 120,000 1%
61 – 120 90,000 2%
Over 120 100,000 6%
Total Accounts Receivables 310,000
During the year, ABC Co, wrote off P7,000 receivables and recovered P4,000 that had been written-off
prior years. The allowance for doubtful accounts has a beginning balance of P2,000.
Requirements: Compute for
a. Doubtful account expense
b. NRV
SOLUTION:
Days Outstanding Receivable Balances % uncollectible
0 – 60 120,000 1% 1 ,200
61 – 120 90,000 2% 1,800
Over 120 100,000 6% 6,000
Allowance for Doubtful Accounts 9,000
Allowance for Doubtful Accounts
2,000 Beginning Balance
Write-off 10,000 Bad debt expense (squeezed) (a)
7,000 4,000 Recoveries
9.000 Ending Balance
IMPORTANT FORMULAS TO REMEMBER;
1. Accounts Receivable, December 31 P xx
Less: Allowance for Doubtful Accounts, December 31 ( xx )
Net Realizable Value P xx
2. Total Sales P xx
Less: Cash Sales ( xx )
Credit Sales (Always use credit sales in computing for BDE) P xx
3. Total Sales Returns, Allowances & Discounts P xx
Less: Sales R, A & D on cash sales ( xx )
Sales Returns, Allowances & Discounts on credit sales P xx
(Deduct only the SRAD that corresponds with the credit sales)
Accounts Receivable
Beginning Balance P xx
Credit Sales xx P xx Sales Returns & Discounts on credit
sales
xx Collections
xx Write-off
Ending Balance P xx
Take note that “recovery” is ignored in the computation of the ending balance of AR.
Allowance for Doubtful Accounts
P xx Beginning Balance
Write-off xx Bad debt expense
P xx xx Recoveries
P xx Ending Balance
