Chapter 5 — Estimation of Doubtful Accounts

Accounts Receivable

Measurement

Initial — measures as original invoice price (face value)

Subsequent — measures as net realizable value (NRV)

NRV — estimated selling price of goods or services, less the estimated costs of completion, disposal, and
transportation

computed every end of the year — kasi dun na gumagawa ng report & part of adjusting entry

it is just mere estimate computation for bad debts on the current year — iestimate agad para mamatch
yung revenue/expense kahit di pa alam kung magbabayad o hindi (matching principle)

Adjusting entry — every end of the year

Doubtful Accounts/Bad Debts/Uncollectible Accounts — client accounts that may not be collected anymore/ are
doubtful of collection

contra asset account, credit normal balance

this is deducted from accounts receivable

Presented: "allowance for doubtful accounts" — to cover those potential losses

debits the allowance for doubtful accounts, and credits accounts receivable

this entry reduces the balance of accounts receivable on the balance sheet and increases the allowance for
doubtful accounts

By debiting the allowance for doubtful accounts, the company is effectively setting aside funds to cover any
future losses that may result from uncollectible accounts

Pro -form adjusting entry

Allowance Method
sinusunod kapag gumagawa ng general purpose of Financial Statement, aligned in standard

Accounts Receivable xxx

Set adjusting entries at the end of the period — to estimate how much of the receivable will never be collected
because of the principle of matching (where there is revenue there is expenses)

Chapter 5 — Estimation of Doubtful Accounts 1

 Recto — maaring totoo na hindi na talaga makakabayad

decreases A/R (credit); increase doubtful accounts (debit)

Recovery — may something na nawala, tapos irerecover, akala mo na hindi pagbabayd pero later on magbabayad

irereverse yung accounts, dahil nga magbabayad na at narecover na

another thing, dahil bayad na — debit cash, credit A/R

Direct Write-off Method

ginagawa lang for the sake of presentation kasi di siya aligned sa standard

Set adjusting entries at the end of the period — to estimate how much of the receivable will never be collected
because of the principle of matching (where there is revenue there is expenses)

para sa BIR ruling — under this ayaw ng BIR na nageestimate

N/A — no adjusting entry

Recto — pag totoo na hindi na talaga makakabayad

decreases A/R; increase doubtful accounts

Recovery — may something na nawala, tapos irerecover, akala mo na hindi pagbabayd pero later on magbabayad

irereverse yung accounts, dahil nga magbabayad na at narecover na

another thing, dahil bayad na — debit cash, credit A/R

Chapter 5 — Estimation of Doubtful Accounts 2

 Methods of Estimating Bad Debts
Percentage of Net Credit Sales/Revenue (service business)— Income Statement Approach = Doubtful Accounts
Expense

provide the amount of doubtful accounts expense for the year

this amount then will be added to the balance before adjustment, the total of the two will then be the amount
of allowance at year end or after adjustment.

Advantage: aligned as matching principle (revenue & expenses)

Disadvantage: it is not directed to receivable, because its sales

(isang percentage lang ang minumultiply sa total receivable)

multiply certain percentage to sales = doubtful accounts expense

sales & doubtful accounts expense — part of income statement

Sales — credit sales (nominal account, accounts receivables)

Net Sales — percentage of sales (silent)

Gross sales — no return/allowances, wala pang bawas/minus na sales discount

Percentage of Accounts Receivable method — Financial Position Approach (balance sheet) = Required Allowance
Balance

provide the amount of required allowance for doubtful accounts

the amount of doubtful accounts expense will be work back as an adjustment to the amount of required
allowance.

Advantage: diretso na sa receivable

Disadvantage: hindi sobrang naka aligned sa principle matching, kasi hindi naman part ng revenues, income
and expense recognition principle dahil ito nga ay receivable

(isang percentage lang ang minumultiply sa total receivable)

certain percentage multiply to receivable = required allowance balance (allowance for doubtful accounts at the
year end)

Aging of Receivable — Financial Position Approach (balance sheet) — Required Allowance Balance

certain percentage multiplied to receivable = required allowance balance (allowance for doubtful accounts at the
year end)

each classification of accounts receivable is multiplied by a

the specific rate of the estimate of uncollectability

transaction right after the date given — pag magbibilang ng date past due

pinakacomplicated but most accurate— modification of percentage of receivable

Chapter 5 — Estimation of Doubtful Accounts 3

 nilalagyan ng edad: percentage multiply to ireceivable na hinati hati sa magkakaibang lugar

Write-off

totoong scenario na hindi na talaga makakabayad

Recovery

may something na nadamage — and narecover

nakalink and write-off & recovery — hindi magkakaroon n g recovery kung walang write-off

transaction recorded as write-off — but later on nagbayad na kaya need ireverse yung entry

reverse the entry in write-off

another thing, dahil bayad na — debit cash, credit A/R

Chapter 5 — Estimation of Doubtful Accounts 4

 Accounts Estimate — currently & prospectively

now & future: hindi papalitan yung naestimate na nung una

Accounting Policy — retrospectively

past, present, future: papalitan/adjust the estimation as tuwing nagbabago

Chapter 5 — Estimation of Doubtful Accounts 5