Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 1

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

ADJUSTING ENTRIES – BAD DEBTS

Learning Objectives:
At the end of this module, learners must be able to:
a. Identify accounts to be adjusted;
b. properly record adjusted transactions;

Provision for Bad Debts

There is always a possibility that receivables from clients will not be fully collected. An
uncollectible receivable is called “BAD DEBT EXPENSE” or “DOUBTFUL ACCOUNTS EXPENSE”.

There are two methods of recording bad debts expense:

1. Direct Write-off Method
2. Allowance Method

Between the two method, Allowance Method is more commonly used due to some reasons
that will be explained in the discussion of each method.

The pro-forma adjusting entry at the end of the accounting period for bad debts are any of
the following:

DEBIT CREDIT
ENTRY
(in PHP) (in PHP)
1. Bad Debts Expense ###
Allowance for Bad Debts ###

To record estimated uncollectible accounts

2. Doubtful Accounts Expense ###
Allowance for Doubtful Accounts ###

To record estimated uncollectible accounts

3. Uncollectible Accounts Expense ###
Allowance for Uncollectible Accounts ###

To record estimated uncollectible accounts

1. Direct Write-Off Method

a. Bad debt expense is recorded when a specific account is ascertained or proven to be
uncollectible (which may not occur in the period of sale).
b. This method is theoretically undesirable because it:
• Makes no attempt to match revenues and expenses.
• Does not result in receivables being stated at net realizable value in the statement of
financial position (balance sheet).

Net Realizable Value is the net expected amount to be collectible from receivable after
adjusting for expected unrecoverable accounts. Or in simpler terms, this is the amount that will
remain after deducting the amount of a sure uncollectible amount.

Illustration – DWO Method

In 2020, the business made P400,000 service income from various clients. P100,000 of which is
on accounts wherein 2% is expected to be non-collectible. In 2021, P1,400 were actually proven
to be non-collectible.

Fundamentals of Accountancy, Business & Management - 1 Page 1 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Journal Entry: (in relation to bad debts)

In 2020
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
2020 None

In 2021
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
2021 Bad Debts Expense 1,400
Accounts Receivable 1,400

To record an account written-off

Notice that there is no entry in 2020 despite the fact that it clearly states in the problem that 2% is
non-collectible, which means we need to record for bad debts expense and allowance for bad
debts as illustrated in the pro-forma adjusting entry for bad debts.

Notice also that instead of allowance for bad debts, we recorded the accounts receivable
(credit). This means that we are removing the amount from our records of receivables because we
are 100% sure it will not be collected.

This is because under the DWO Method, we will only record an adjusting entry for bad debts
when we are 100% we can’t collect the amount due to various reasons like the client went bankrupt,
they lost their properties due to fire, etc.

If the client managed however to recover and was able to pay us, we need to recover first the
amount owed to us:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Accounts Receivable 1,400
Allowance for Bad Debts 1,400

To record re-establishment of accounts

previously written off

This entry will allow us to get back the possibility of our receivable to be collected. It is as if we
recorded a debit of bad debts expense (P1,400) and a credit of allowance for bad debts (P1,400)
during our adjusting entry in 2021.

When the client will be paying us now or we are able to collect the receivable already, then we
simply record the collection of receivables.
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Cash 1,400
Accounts Receivable 1,400

To record collection of accounts

The allowance for bad debts account is a contra-asset account and is presented as a
deduction against the amount of accounts receivables in the statement of financial position
(balance sheet). Net realizable value is computed as follows:

Net Realizable Value = Accounts Receivable – Allowance for Bad Debts

Fundamentals of Accountancy, Business & Management - 1 Page 2 of 6
 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

The allowance for bad debts, end may be computed as follows:

Allowance for Bad Debts, Beginning ###

Add: Bad Debts Expense ###
Recovery of accounts written-off ###
Total ###
Less: Accounts written-off ###
Allowance for Bad Debts, Ending ###

2. Allowance Method
Bad Debts Expense is estimated and recorded as expense in the year the business sells the
goods or services on account. This method is justified because the business incurs loss at the
moment it sells goods or services to non-paying customers and not later when the receivable is
actually determined to be uncollectible.

This method better matches cost or expenses against revenue and results in receivable
valuation which is a more realistic portrayal of the economic value of the receivable. This is the
one prescribed by generally accepted accounting principles (GAAP); hence, it is also called
GAAP METHOD.

Methods of Estimating Bad Debts under allowance method:

Method Description
1. % of Account Sales Bad debt expense is equal to % of account sales or revenues
made on credit
2. % of Receivable The required balance of allowance for bad debts is
computed as a percentage of the ending receivable
balance. Bad debt expense is determined based on the
change in the balance of the allowance account.
3. Aging of Accounts Receivable Each individual customer account is aged and an estimate
of uncollectibility is assigned based on the previous
experience on each age of receivable accounts turning to
be bad debts. The balance computed is the required ending
balance of allowance for bad debts. Bad debt expense is
then determined based on the change in the balance of the
allowance account.

In this module, we will only have the first two method of estimating bad debts. The 3rd method
shall be discussed in your higher accounting subject.

Illustration – DWO Method

In 2020, the business made P400,000 service income from various clients. P100,000 of which is
on accounts wherein 2% is expected to be non-collectible. In 2021, P1,400 were actually proven
to be non-collectible.

Journal Entry: (in relation to bad debts)

In 2020
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
2020 Bad Debts Expense 2,000 (100,000 x 2%)
Allowance for Bad Debts 2,000

To record estimated bad debts expense

Fundamentals of Accountancy, Business & Management - 1 Page 3 of 6
 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

In 2021
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
2021 Allowance for Bad Debts 1,400
Accounts Receivable 1,400

To record an account written-off

If the client managed however to recover and was able to pay us, we need to recover first the
amount owed to us:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Accounts Receivable 1,400
Allowance for Bad Debts 1,400

To record re-establishment of accounts

previously written off

This entry will allow us to get back the possibility of our receivable to be collected. It is as if we
recorded a debit of bad debts expense (P1,400) and a credit of allowance for bad debts (P1,400)
during our adjusting entry in 2021.

When the client will be paying us now or we are able to collect the receivable already, then we
simply record the collection of receivables.

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Cash 1,400
Accounts Receivable 1,400

To record collection of accounts

Percentage of Receivable Method

Under the percent of receivable method, the estimated bad debt rate multiplied to the
balance of accounts receivable is the required allowance for bad debts. The bad debt expense is
established by analyzing the allowance account, using the following T-Account:

Allowance for Bad Debts

### Beginning Balance
Accounts Witten-Off ### ??? Bad Debts Expense
*Ending Balance ###

*this is the required allowance which is computed as bad debts ratio x accounts receivable balance.

Illustration – Percent of Receivable Method

Before preparation of financial statements at December 31, 2020, the business has P200,000 accounts
receivables from various customers. Based on past experience, about 5% of receivables will not be
collected. On April 4, 2020, P4,000 accounts were proven to be uncollectible. The allowance for bad
debts as of December 31,2016 last year has a balance of P5,000.

Fundamentals of Accountancy, Business & Management - 1 Page 4 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Journal Entry in 2020:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
Apr 4, 2020 Allowance for Bad Debts 4,000
Accounts Receivable 4,000

To record an account written-off

The bad debt expense shall be computed as follows:

Allowance for Bad Debts
P 5,000 Beginning Balance
Accounts Witten-Off P 4,000 P 9,000 Bad Debts Expense
*Ending Balance P 10,000 P 10,000

*200,000 x 5% = P10,000

Adjusting Entry in 2020:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
Dec 31, 2020 Bad Debts Expense 9,000
Allowance for Bad Debts 9,000

To record estimated bad debt expense

Alternatively, the bad debts expense may be computed by work-back computation as

follows:
Allowance for Bad Debts, Beginning P 5,000
Add: Bad Debts Expense 9,000
Recovery of accounts written-off 0
Total 14,000
Less: Accounts written-off 4,000
Allowance for Bad Debts, Ending (200,000 x 5%) P 10,000

The Net Realizable Value is computed as follows:

NRV = Accounts Receivable – Allowance for Bad Debts
NRV = 200,000 – 10,000
NRV = P190,000

This means that at the end of the accounting period, in the financial statement, the value of
Accounts Receivable will be P190,000.

Bad Debts Expense is not much of an issue when it comes to service businesses due to the fact
that services are normally sold for cash. Businesses involved in trading are particularly exposed to bad
debts due to the volume of their transactions made on credit with customers. Trading businesses uses
any of the aforementioned methods of estimating bad debts.

Fundamentals of Accountancy, Business & Management - 1 Page 5 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 7 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

References:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South Triangle,
Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books,

Fundamentals of Accountancy, Business & Management - 1 Page 6 of 6