ACC124 Doubtful-Accounts
ACC124 Doubtful-Accounts
ACC124 Doubtful-Accounts
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Accounts
Methods of estimating doubtful accounts
Doubtful accounts are recognized when the loss is probable and the amount can be
estimated reliably.
Involves an analysis where the accounts are classified into not due or past due
a. Not due
b. 1 to 30 days past due
c. 31 to 60 days past due
d. 61 to 90 days past due
e. 91 to 120 days past due
f. 121 to 180 days past due
g. 181 to 365 days past due
h. More than 1 year past due
i. Bankrupt or under litigation
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.
The major argument for the use of this method is the more accurate and
scientific computation of the allowance for doubtful accounts, and
consequently, the accounts receivable are fairly presented in the statement of
financial position at net realizable value.
The objection to the aging method is that it violates the matching process.
Moreover, this method could become prohibitively time consuming if a large
number of accounts are involved.
Illustration:
The following data summarized in aging the accounts receivable at the end of period:
(b) (a x b)
(a) Experience Required
Balance rate allowance
Not due 500,000 1% 5,000
1-30 days past due 300,000 2% 6,000
31 to 60 days past due 200,000 4% 8,000
61 to 90 days past due 100,000 7% 7,000
91 to 180 days past due 50,000 10% 5,000
181 to 365 days past due 30,000 30% 9,000
More than 1 year 20,000 50% 10,000
1,200,000 50,000
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 the past experience of the entity.
Moreover, the loss experience rate may be difficult to obtain and may not be
reliable.
Illustration:
The balance of accounts receivable is P2,000,000 and the credit balance in the
allowance for doubtful accounts is P10,000. Doubtful accounts are estimated
at 3% of accounts receivable.
Journal entry:
This is so because the bad debt loss is directly related to sales and reported
in the year of sale.
The percent of sales method of estimating doubtful accounts has the disadvantage
of the allowance for doubtful accounts being inadequate or excessive. Aging the
accounts is then necessary to test the reasonableness of the allowance.
Thus, on December 31, the allowance account has debit balance of P20,000 before
adjustment.
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The debit balance does not indicate that the allowance is inadequate because the
accounts written off during the year and charged to the allowance may have arisen
from the current year sales.
Thus, the charge to the allowance account simply predates the recording of doubtful
accounts. At the end of the period, when adjustments are made, the debit balance
should be considered.
To continue the example – if on December 31, the required allowance is P40,000 the
adjustment should be:
PFRS 9, paragraph 5.2.2 provides that an entity shall apply the impairment
requirements in paragraphs 58 to 65 of PAS 39 for financial asset measured at
amortized cost.
PAS 39 paragraph 58, provides that an entity shall assess at every year-end whether
there is an objective evidence that a financial asset or group of financial assets is
impaired.
Customer A 1,000,000
Customer B 1,500,000
Other customers’ accounts 4,000,000
Total other accounts receivable 6,500,000
The impairment loss is recorded as follows:
The accounts receivable from customers A and B which are not considered impaired should be
included in the collective assessment of all other accounts receivable.
This is the controversial part of the computation but the inclusion of unimpaired accounts
receivable in the collective assessment for impairment is prescribed by the standard. The rule
is principally prescriptive rather than principle – based.
The percentage of accounts receivable and percentage of sales method can be considered
“collective assessment approach” of measuring impairment.