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

Doubtful Accounts xxx

Allowance for Doubtful Accounts xxx

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.

Doubtful Accounts xxx

Allowance for Doubtful Accounts xxx

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.
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 classified 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.