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    Chapter 5 Estimation of Doubtful Accounts

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    marites yu
    The document discusses methods for estimating doubtful accounts, including aging accounts receivable, using a percentage of accounts receivable, and using a percentage of sales. The percentage of sales method best matches the expense to revenue but may not accurately reflect the realizable value of accounts. The other methods present the receivables at net realizable value but violate the matching principle. The document also provides examples of calculating doubtful accounts under each method.

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    Chapter 5 Estimation of Doubtful Accounts

    Uploaded by

    marites yu
    88 views11 pages
    The document discusses methods for estimating doubtful accounts, including aging accounts receivable, using a percentage of accounts receivable, and using a percentage of sales. The percentage of sales method best matches the expense to revenue but may not accurately reflect the realizable value of accounts. The other methods present the receivables at net realizable value but violate the matching principle. The document also provides examples of calculating doubtful accounts under each method.

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    The document discusses methods for estimating doubtful accounts, including aging accounts receivable, using a percentage of accounts receivable, and using a percentage of sales. The percentage of sales method best matches the expense to revenue but may not accurately reflect the realizable value of accounts. The other methods present the receivables at net realizable value but violate the matching principle. The document also provides examples of calculating doubtful accounts under each method.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    88 views11 pages

    Chapter 5 Estimation of Doubtful Accounts

    Uploaded by

    marites yu
    The document discusses methods for estimating doubtful accounts, including aging accounts receivable, using a percentage of accounts receivable, and using a percentage of sales. The percentage of sales method best matches the expense to revenue but may not accurately reflect the realizable value of accounts. The other methods present the receivables at net realizable value but violate the matching principle. The document also provides examples of calculating doubtful accounts under each method.

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    © All Rights Reserved
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    You are on page 1of 11

    ESTIMATION OF DOUBTFUL

    ACCOUNTS
    Doubtful Account
    A doubtful account or doubtful debt is an account receivable that
    might become a bad debt at some point in the future. 
    Methods of Estimating Doubtful Accounts

    1. Aging the accounts receivable or “statement of


    financial approach”
    2. Percent of accounts receivable or also statement
    of financial position approach
    3. Percent of sales or “income statement approach”
    This method has the advantage of presenting fairly the accounts
    receivable in the statement of financial position at net receivable.

    However, aging method violates the matching process.


    Required allowance: 50,000
    Less: Allow. Bal before
    adj. 10,000
    Doubtful accounts 40,000

    Doubtful accounts 40,000


    Allowance for doubtful 40,000
    accounts
    Percent of Accounts Receivable

    A certain rate is multiplied by the open accounts at the end of the period
    in order to get the required allowance balance.

    Rate used is determined from past experience of the entity.

    Has the advantage of presenting the accounts receivable at estimated net


    realizable value.

    However, this approach violates the principle of matching bad debt loss
    against the sales revenue.
    Required allowance (2,000,000 x 3% ) 60,000
    Less: Credit bal. in allowance 10,000
    Doubtful account 50,000

    Doubtful accounts 50,000


    Allowance for doubtful accounts 50,000
    Percent of Sales

    The amount of sales for the year is multiplied by a certain rate to get
    the doubtful account expense.

    When the percent of sales method is used in computing doubtful


    accounts, proper matching of cost against revenue is achieved.

    However, this method may not show accounts receivable at estimated


    realizable value because the allowance for doubtful accounts may prove
    excessive or inadequate.
    5,000,000 – 50,000 = 5,000,000 x 1% = 50,000

    Doubtful Accounts 50,000


    Allowance for doubtful accounts 50,000
    a. Credit sales (5,000,000 x 75%) 3,750,000
    DA (3,750,000 x 2%) 75,000

    Doubtful accounts 75,000


    Allowance for doubtful accounts 75,000

    b. Doubtful accounts (5,000,000 x 1%) 50,000


    Allowance for doubtful accounts 50,000

    c. Required allowance 80,000


    Less: Credit bal. of allow. 20,000
    DA 60,000

    Doubtful accounts 60,000


    Allowance for doubtful accounts 60,000

    d. Required allowance (500,000 x 10%) 50,000 Doubtful accounts 30,000


    Less: Credit bal. of allow. 20,000 Allow. For doubtful accts. 30,000
    DA 30,000

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