CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
ACCOUNTS RECEIVABLES
Three Methods of Estimation Debit Balance of Allowance account
1. Percentage of Sales or Income ● Result of the policy to adjust the
Statement approach (Single loss allowance from written accounts
rate approach) during the year.
2. Percentage of Accounts receivable ● Does not indicate allowance is
or Balance sheet approach (Single inadequate.
loss rate approach) ● Simply indicates/predates recording
3. Aging the Accounts receivables or of doubtful/bad debt expense
also Balance sheet approach
(Matrix provision) 2. Percent of Accounts receivables
● Certain rate is multiplied to
1. Percent of Sales accounts receivable at the end of
● Rate to be used is computed using the period to get the required
historical data. allowance balance.
● The amount of sales for the year is ● Conforms to presentation of NRV
multiplied by a certain rate to get ● Violates the matching principle
the doubtful account expense ● Loss experience may be difficult to
● In accordance with matching obtain and may be not be reliable
principle
Correction in allowance for doubtful 3. Aging of Accounts receivable
accounts ● Analysis should be done to classify
● Receivables may not shown at NRV accounts into not due and past due
because the allowance may prove (outstanding)
excessive or inadequate ● Each rate is multiplied to each
● Aging the accounts is necessary for classification of accounts receivable
reasonableness at the end of the period to get the
● Adjustments required allowance balance.
Inadequate allowance: ● Conforms to presentation of NRV
Doubtful account/Bad debt expense xx ● Violates the matching principle
Allowance for doubtful/Bad debt xx ● Time consuming for large number
Or: Excessive allowance: of charged accounts
Allowance for doubtful/Bad debt xx
Doubtful account/Bad debt expense xx Summary
Credit Balance of Doubtful/Bad debt
Expense
● Adjustment for a discrepancy where
there is excessive allowance more
than the debit is the balance of
Doubtful/bad debt expense.
Excessive allowance:
Allowance for doubtful/Bad debt xx
Doubtful account/Bad debt expense xx
Miscellaneous income xx
CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
ACCOUNTS RECEIVABLES
Sample Problem 1 (Percentage of Sales)
29,500 Estimates
Records of Alpha Company includes the
following: 40,000 End
Accounts Receivable P 1,000,000
To compute the estimate:
Sales:
Work back
Cash sales 900,000
Ending - Beginning = 40,000 - 10,500
Credit sales 5,100,000
To record:
Sales discounts 20,000
Bad Debts Expense 29,500
Sales returns 80,000
Allowance for doubtful accounts 29,500
Percentage of sales 2%
How much is the estimate of BDE?
Sample Problem 3 ( Aging of Accounts
Solution:
Receivable)
Credit Sales 5,100,000 Records of Gama Company includes the
following:
Sales Discounts (20,000)
Sales Returns (80,000) Balance Experience
rate
5,000,000 (uncollectible)
Percentage of sale 2% Not due 700,000 2%
Bad debts expense 100,000 1-30 days 600,000 2%
past due
Journal Entry
Bad Debts Expense 100,000 31-60 days 500,000 3%
Allowance for doubtful accounts 100,000 past due
Sample Problem 2 (Percentage of 61-90 days 40,000 15%
Accounts Receivable) past due
Records of Meta Company includes the
91-180 30,000 30%
following:
days past
Accounts Receivable P 2,000,000 due
Net credit Sales 5,000,000
Allowance for doubtful accounts before adj 181-265 20,000 40%
10,500 days past
Percentage of accounts receivable 2% due
How much is the BDE?
More than 1 10,000 50%
Solution: year
Accounts receivable x Percentage
2,000,000 x 2% = 40,000 Solution:
Credit balance if silent 700,000 * 2% = 14,000
600,000 * 2% = 12,000
Allowance 500,000 * 3% = 15,000
40,000 * 15% = 6,000
10,500 Before Adj.
30,000 * 30% = 9,000
CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
ACCOUNTS RECEIVABLES
20,000 * 40% = 8,000 Company estimates 3% of gross
10,000 * 50% = 5,000 receivables will be uncollectible. The
TOTAL= 69,000 adjusted allowance for doubtful account as
of December 31, 2021 is:
Allowance
a. P90,000
10,000 (Beginning) b. P82,000
c. P38,000
59,000 d. P30,000
(Estimates)
On January 1, 2021, Melay Co. had a credit
69,000 (Ending)
balance of P260,000 in its allowance for
Journal Entry uncollectible accounts. Based on past
Bad Debts Expense 59,000 experience, 2% of Melay’s credit sales have
Allowance for Doubtful Accounts 59,000 been uncollectible. During 2021, Malay
wrote off P325,000 of uncollectible
QUICK CHECK accounts. Credit sales for 2021 were
A method of estimating bad debts that P9,000,000. In its December 31, 2021
focuses on the balance sheet rather than balance sheet, what amount should Melay
the income statement is the allowance report as allowance for uncollectible
method method based on accounts?
a. Direct write-off a. P115,000
b. Aging the trade b. P180,000
receivables accounts c. P245,000
c. Credit sales d. P440,000
d. Specific accounts
determined to be
uncollectible Accounts receivable
325,000 260,000
The following accounts were extracted from
Sugar Co. unadjusted trial balance at 180,000
December 31, 2021:
115,000
Debit Credit Journal Entry
Bad debts expense 180,000
Accounts P 1,000,000 Allowance for doubtful accounts 180,000
receivables
Allowance 9,000
for doubtful
accounts
Net credit 3,500,000
sales
