Doubtful Accounts (Bad Debts)

Doubtful Accounts

• An expense account representing receivable accounts that, for some reasons, have become doubtful of collection or worthless as of a given balance sheet date.

Allowance for Doubtful Accounts

• A contra-account of Accounts Receivable which represents accumulated amount that has been provided for anticipated losses on uncollectible accounts.

Notes:

• e practice of providing for probable losses is governed by two GAAPs: Matching Principle and Conservatism.

• e pro-forma adjusting entry is

Method of Recording Doubtful Accounts

Allowance Method

• is is the method prescribed by accounting standards. An estimated percentage of accounts receivable, based on company experience, are recognized as loss or uncollectible at the end of the accounting period.

Method of Estimating Doubtful Accounts

Percentage-of-Receivables Approach

• is approach provides a reasonably accurate estimate of the realizable value of receivables.

• is is also called Statement of Financial Position Approach because the basis of computation is Accounts Receivable.

• e governing GAAP is Conservatism.

• It takes into account the previous balance of the Allowance for Doubtful Accounts.

Doubtful Accounts xxx

Allowance for Doubtful Accounts xxx

Doubtful Accounts xxx

Allowance for Doubtful Accounts xxx

Formula in Computing the Estimated Loss on Accounts (Doubtful Accounts)

Accounts Receivable, end P xxx

Multiplied by: Estimated Loss Rate xx

Required Allowance P xxx

Less: Balance of Previous Allowance xx

Doubtful Accounts P xxx

Aging of Accounts Receivable

• Outstanding customer accounts are classi"ed or grouped according to maturity dates and accounts which are past due for a longer period are assigned higher estimated loss rates.

• is is the most widely used method of estimating doubtful accounts.