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Estimation of Doubtful Accounts (Chapter 5)

This document discusses methods for estimating doubtful accounts, including aging of accounts receivable, percentage of accounts receivable, and percentage of sales. It explains that aging of accounts receivable involves classifying accounts into categories based on days past due and applying loss rates to each category. The percentage of accounts receivable method applies a rate to outstanding accounts receivable to estimate the required allowance amount. The percentage of sales method applies a rate to current period credit sales to estimate the doubtful accounts expense for the period.

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973 views12 pages

Estimation of Doubtful Accounts (Chapter 5)

This document discusses methods for estimating doubtful accounts, including aging of accounts receivable, percentage of accounts receivable, and percentage of sales. It explains that aging of accounts receivable involves classifying accounts into categories based on days past due and applying loss rates to each category. The percentage of accounts receivable method applies a rate to outstanding accounts receivable to estimate the required allowance amount. The percentage of sales method applies a rate to current period credit sales to estimate the doubtful accounts expense for the period.

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ESTIMATION OF

DOUBTFUL ACCOUNTS
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 5: Estimation of Doubtful
Accounts
■ After studying this chapter, one should be able to:
a.) To identify the methods of estimating doubtful accounts expense.
b.) To understand the argument for and against the aging of accounts receivable
method.
c.) To understand the argument for and against the percentage of accounts
receivable method.
d.) To understand the argument for and against the percentage of sales method.
e.) To determine the doubtful accounts expense and the allowance for doubtful
accounts under aging, percentage of accounts receivable and percentage of
sales method.
Methods of Estimating Doubtful Accounts:
1. Aging the Accounts Receivable or Statement of
Financial Position Approach
2. Percent of Accounts Receivable or Statement of
Financial Position Approach
3. Percent of Sales or Income Statement Approach
Allowance for Doubtful Accounts

Write Off xxx xxx Beg

  xxx DAE

  xxx Recovery

xxx End /Req Allowance


Aging of Accounts Receivable
The aging of accounts receivable involves an analysis
where the accounts are classified into not due or past due.

a. Not due e. 91 to 120 days past due


b. 1 to 30 days past due f. 121 to 180 days past due
c. 31 to 60 days past due g. 181 to 365 days past due
d. 61 to 90 days past due h. More than 1 year past due
Aging of Accounts Receivable (cont.)
The allowance is then determined by multiplying the
total of each classification by the rate or percent of loss
experienced by the entity for each category.

= Required Allowance / ADA, end


When is an account past due?
The credit terms will determine whether an account is
past due. For example, if the credit terms were 2/10, n/30
and the account is 45 days old, it is considered to be 15 days
past due.

Therefore, the phrase “past due” refers to the period


beyond the maximum credit term. In the example, the credit
term or credit period is 30 days.
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.
The rate used is usually determined from past
experience of the entity.

= Required Allowance / ADA, end


Percent of Sales
The amount of sales for the year is multiplied by a
certain rate to get the doubtful accounts expense. The rate
may be applied on credit sales or total sales.

The rate is multiplied by the current year’s charge sales


to arrive at the doubtful accounts expense.

= Doubtful Accounts Expense


Account Receivable
Beg BalanceCollections

Credit SalesSales Returns

RecoveryWrite Offs

  FOB Destination, FC

 
Note:
1. Percent of Sales = expense for the period (matching principle)
2. Percent of Accounts Receivable = required balance (ending)
3. Aging of Accounts Receivable = required balance (ending)
Illustration:

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