ESTIMATED UNCOLLECTIBLE ACCOUNTS RECEIVABLE OR

BAD DEBTS
In spite of the great caution taken in the granting of credit to
customers, the business may suffer some loss from inability to collect
the receivables. This is known as bad debts.
The amount of bad debts represents the impairment loss on
receivables.
Impairment loss occurs when the carrying value of the receivables
exceeds the collectible receivables or present value of the estimated
cash flows or collection of the receivables.
2 Methods of Recognizing Bad Debts
(1) Direct Write-off Method - this is direct credit to Accounts
Receivable
Journal Entry at the time of write off:
Bad Debts Expense
Accounts Receivable
To write off bad debts

xxx
xxx

(2) Allowance Method the use of an allowance account

Adjusting Journal Entry:
Bad Debts Expense
Allowance for Bad Debts
To record bad debts

xxx
xxx

Journal entry at the time of write off:

Allowance for Bad Debts
Accounts Receivable
To write off bad debts

xxx
xxx

UNDER THE ALLOWANCE METHOD:

Loss from bad debts for the current period may be estimated by the
use of the following methods:
(1) The accounts receivable balance at the end of the current period
is multiplied by a certain percentage to obtain the amount of the
estimated bad debts to be recorded as part of the AJE.
The percentage is based on the historical relationship between the
outstanding receivables and uncollectible amount. And it is
modified on the basis of current observable data to reflect the
effects of the current condition.
Example:
As of end of its first year of operation, outstanding balance of
Accounts Receivable is P100,000. It is estimated that 5 % of
these is uncollectible.
P100,000 x 5% = P5,000

Adjusting Journal Entry:

Dec 31

Bad Debts Expense

Allowance for Bad Debts
To record bad debts for the year

5,000
5,000

(2) An aging analysis may be prepared on the customers receivables

at the Statement of Financial Position date.
The base point for determining age is the due date of the account.
The analysis is completed by adding the columns to determine
the total amount of receivables in each age group. Based on the
entitys past experience or other available statistics, historical bad
debts percentage are applied to each of the aggregate amounts
with larger percentages being applied to the older accounts.
Account
Classification
1-30 days
31-60 days
61-90 days
91-120 days
Total

Balance
P500,000
100,000
150,000
200,000

%
Doubtful
1%
5%
10%
15%

Estimated
Uncollectible
P 5,000
5,000
15,000
30,000
P 55,000

Adjusting Journal Entry:

Dec 31 Bad Debts Expense
55,000
Allowance for Bad Debts
55,000
To record bad debts for the year

ILLUSTRATION:
At the end of the December 31, 2010, the Accounts Receivable account has a
debit balance of P90,000.
Case A.
Analysis of year end balance of Accounts Receivable indicates that 10% will
be uncollectible.
To compute :

P 90,000 x 10% = P9,000

Dec 31 Bad Debts Expense

9,000
Allowance for Bad Debts
9,000
To record bad debts (P90,000 x 10%)
Case B:
Analysis of year end balance of Accounts Receivable indicates that 10% will
be uncollectible. The Allowance for Bad Debts has an outstanding credit
balance of P5,000.
Analysis: Since the allowance for bad debts account has already a credit
balance of 5,000, the amount of Bad Debts Expense we have to set up at
year end should be P4,000 only. (P9,000-P5,000)
Adjusting Journal Entry:
Dec 31

Bad Debts Expense

Allowance for Bad Debts

4,000
4,000

To record bad debts ((P90,000 x 10%) 5,000)

after posting the adjustment, the balance of the Allowance for

Bad Debts account is:
ALLOWANCE FOR BAD DEBTS
DEBIT

CREDIT
Balance
Dec AJE
End Balance

5,000
4,000
9,000

Case C: Analysis of year end balance of Accounts Receivable indicates

that 10% will be uncollectible. The Allowance for Bad Debts has a debit
balance of P5,000. Analysis:
Analysis: Since the allowance for bad debts account has debit balance of
5,000, the amount of Bad Debts Expense we have to set up at year end in
should be P14,000 only. (P5000 + P9,000) . This is to bring the Allowance
for Bad Debts balance to P9,000 ( the required balance).
Adjusting Journal Entry:
Dec 31

Bad Debts Expense

14,000
Allowance for Bad Debts
14,000
To record bad debts (( P90,000 x 10%) + 5,000)

after posting the adjustment, the balance of the Allowance for

Bad Debts account is:

ALLOWANCE FOR BAD DEBTS

DEBIT
Beg Balance P 5,000

CREDIT
Dec AJE
End Balance

14,000
9,000

FINANCIAL STATEMENT PRESENTATION OF BAD DEBTS:

CASE A:
Notes to Financial Statement:
Note 1: Trade and Other Receivables
Accounts Receivable
Less: Allowance for Bad Debts
Notes Receivable
Interest Receivable
Total

P 90,000
9,000

P81,000
xxx
xxx
P xxx