ESTIMATION OF

DOUBTFUL ACCOUNTS
Intermediate Accounting 1
Outline
ØMethods of Accounting Bad Debts
ØAllowance for Bad Debts Account
ØEstimating Bad Debts Expense and
Allowance for Bad Debts
ØDebit Balance in the Allowance for
Bad Debts
ØChanges in the Estimate of Bad Debts
ØEstimating the Percentage of Bad Debts
METHODS OF
ACCOUNTING
BAD DEBTS
Ø Direct Write-Off Method
Ø Allowance Method
 Direct Write-Off
Allowance Method
Method
Bad debts are recorded Bad debts are estimated
only when accounts and recorded even if there
General Principle
receivables cannot be are no actual collectability
actually collected issues
Timing of bad
debts expense Late recognition Timely recognition
recognition
Theoretically more correct
Easier to apply since no since this is based on the
Basis of use estimates for bad debts are requirements of PFRS 9 in
needed to be made applying the “expected
credit loss model”
 Direct Write-Off
Allowance Method
Method
There is a decrease in:
Recording of Not applicable (i.e., no
Ø the net carrying amount
estimated bad estimation of bad debts
of accounts receivable
debts amounts)
Ø amount of net income
There is a decrease in: No effect in:
Recording of Ø the net carrying amount Ø the net carrying amount
actual write-off of accounts receivable of the accounts receivable
Ø amount of net income Ø amount of net income
 Direct Write-Off Method Allowance Method
There is no effect in:
There is no effect in:
Ø the gross carrying amount
Ø the gross carrying
Recording of accounts receivable
amount of accounts
collection of Ø the net carrying amount of
receivable
previously accounts receivable
Ø amount of net income
written-off
accounts There is an increase in:
There is a decrease in:
(recoveries) Ø the amount of net income,
Ø the net carrying amount
due to a credit to bad debts
of accounts receivable.
expense.
As of December 31, 2025, WLC Company reported a
P3,000,000 balance in its accounts receivable. It is
estimated that P40,000 of these will become
uncollectible in the future.
On January 30, 2026, it was confirmed that P30,000 of
accounts receivables cannot be collected and was
written-off since the customers filed for bankruptcy and
has no assets remaining. However, on March 31, 2026,
one of these customers miraculously recovered and
paid the previously written-off account of P20,000.
Required: Prepare journal entries using
the direct write-off method and
allowance method.
Direct Write-Off Method
Recording of estimated bad debts:
No entry.

Recording of actual write-off on 01/30/26:

Bad Debt Expense P 30,000
Accounts Receivable P 30,000
Recording of recoveries on 03/31/26:
Accounts Receivable P 20,000
Bad Debt Expense P 20,000
Cash P 20,000
Accounts Receivable P 20,000
Allowance Method
Recording of estimated bad debts:
Bad Debt Expense P 40,000
Allowance for Bad Debts P 40,000
Recording of actual write-off on 01/30/26:
Allowance for Bad Debts P 30,000
Accounts Receivable P 30,000
Recording of recoveries on 03/31/26:
Accounts Receivable P 20,000
Allowance for Bad Debts P 20,000
Cash P 20,000
Accounts Receivable P 20,000
ALLOWANCE FOR
BAD DEBTS ACCOUNT
This account represents the
estimated portion of receivables
that are NOT expected to be
collectible from customers.

It has a normal credit balance as

it is a contra-asset account
against accounts receivable.
Allowance for bad debts, beginning Pxx
Estimated bad debts expense xx
Write-off (xx)
Recoveries xx
Allowance for bad debts, ending Pxx
ESTIMATING BAD
DEBTS EXPENSE
AND ALLOWANCE
FOR BAD DEBTS
Ø Percentage-of-sales method
Ø Accounts receivable method
Ø Aging of receivables method
Percentage-of-Sales Method
The amount of credit sales for the year is
multiplied by a certain rate to get the
doubtful accounts expense.

Estimation of Doubtful Accounts

 Percentage-of-Sales Method
1. First, compute the amount of estimated bad
debts expense using the following formula:

Bad Debts Expense = Net Credit Sales ×

Expected Uncollectible Accounts (in %)
Generally, net credit sales is the basis instead of
the total sales since there are no collectability
issues that will arise from cash sales.
Estimation of Doubtful Accounts
 Percentage-of-Sales Method

2. Next, use the computed bad debts expense

amount in step 1 to compute for the ending
balance of the allowance for bad debts.

Estimation of Doubtful Accounts

During the year 2025, COAB Company reported net
sales of P10,000,000, of which 20% were cash sales. At
the beginning of the year, allowance for bad debts
amounted to P150,000. Write-off and recoveries during
the same period amounted to P120,000 and P12,000,
respectively. It is expected that 2% of the net credit sales
amount will become uncollectible. As of December 31,
2025, accounts receivable account balance amounted
to P3,500,000.
Required: From this information, determine
the amounts of bad debts expense and
ending allowance for bad debts.
Net credit sales is computed as P8,000,000
(P10,000,000 x 80%). The amount of estimated bad
debts expense is then computed as:

Bad Debts Expense = Net Credit Sales ×

Expected Uncollectible Accounts (in %)
Bad Debts Expense = P8,000,000 × 2%
Bad Debts Expense = P160,000
The ending balance of the allowance for bad debts can now
be determined as follows:
Allowance for bad debts, beginning P 150,000
Estimated bad debts expense 160,000
Write-off (120,000)
Recoveries 12,000
Allowance for bad debts, ending P 202,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 3,500,000
Less: Allowance for bad debts (202,000)
Accounts receivable, carrying amount P 3,298,000
 Percentage-of-
sales Method PROS
Ø There is proper matching
WARNING: The allowance for of cost against revenue.
doubtful accounts may prove
excessive or inadequate. Thus, it
becomes necessary that from CONS
time to time the accounts Ø Accounts receivable may
should be “aged” to ascertain not be shown at
the probable loss. estimated realizable
value.
Estimation of Doubtful Accounts
Accounts Receivable Method
A certain rate is multiplied by the open
accounts at the end of the period in order
to get the required allowance balance.

Estimation of Doubtful Accounts

 Accounts Receivable Method
1. First, compute the ending balance of
allowance for bad debts as follows:
Ending Balance of Allowance = Accounts
Receivable × Expected Uncollectible
Accounts (in %)

Estimation of Doubtful Accounts

 Accounts Receivable Method
It should be noted that unlike in the percentage-
of-sales method, the ending balance of the
allowance for bad debts is the first amount
that will be computed under the accounts
receivable method.
In addition, the accounts receivable balance
shall be properly adjusted before applying the
expected percentage.
Estimation of Doubtful Accounts
 Accounts Receivable Method

2. Next, compute the bad debts expense.

Estimation of Doubtful Accounts

During the year 2025, JPIA Company reported net sales
of P10,000,000, of which 20% were cash sales. At the
beginning of the year, allowance for bad debts
amounted to P150,000. Write-off and recoveries during
the same period amounted to P120,000 and P12,000,
respectively. It is expected that 5% of the accounts
receivable balance will become uncollectible. As of
December 31, 2025, accounts receivable account
balance amounted to P3,500,000.
Required: From this information, determine
the amounts of bad debts expense and
ending allowance for bad debts.
The ending balance of allowance for bad debts shall be
computed as:

Ending Balance of Allowance = Accounts

Receivable × Expected Uncollectible Accounts
(in %)
Ending Balance of Allowance = P3,500,000 × 5%
Ending Balance of Allowance = P175,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 150,000
Bad debts expense (SQUEEZED) 133,000
Write-off (120,000)
Recoveries 12,000
Allowance for bad debts (required allow.) P 175,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 3,500,000
Less: Allowance for bad debts (175,000)
Accounts receivable, carrying amount P 3,325,000
 PROS
Ø Presents the accounts
receivable at estimated
net realizable value
Accounts Ø Simple to apply
Receivable
Method CONS
Ø Violates the matching
process
Ø Loss experience rate may
be difficult to obtain and
Estimation of Doubtful Accounts may not be reliable.
Aging of Accounts Receivable

The aging of accounts receivable involves an

analysis where the accounts are classified
into not due or past due.

Estimation of Doubtful Accounts

 Aging of Accounts Receivable
The previously mentioned two-step procedures
on the accounts receivable method are still
applicable in the aging method.

However, accounts receivable method uses only

one percentage to apply to the total accounts
receivable balance, while aging method uses
more than one percentage.
Estimation of Doubtful Accounts
 Aging of Accounts Receivable
Under the aging method, the balance of accounts
receivable is split based on their age bracket.

Age in this case is how long each receivable has

been outstanding.
Each age bracket has a corresponding
percentage of expected uncollectible accounts.
Estimation of Doubtful Accounts
Estimation of Doubtful Accounts
During the year 2025, PICPA Company reported net
sales of P10,000,000, of which 20% were cash sales. At
the beginning of the year, allowance for bad debts
amounted to P150,000. Write-off and recoveries during
the same period amounted to P120,000 and P12,000,
respectively. As of December 31, 2025, accounts
receivable account balance amounted to P3,500,000,
which can be aged as follows:
 Age Bracket Amount % Collectible % Uncollectible
Less than 31 days P 2,800,000 96% 4%
31-60 days 500,000 90% 10%
More than 60 days 200,000 86% 14%
P 3,500,000

Required: From this information, determine

the amounts of bad debts expense and
ending allowance for bad debts.
 The ending balance of allowance for bad debts is
computed as:

% Allowance for
Age Bracket Amount
Uncollectible Bad Debts
Less than 31 days P 2,800,000 4% P 112,000
31-60 days 500,000 10% 50,000
More than 60 days 200,000 14% 28,000
P 3,500,000 P 190,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 150,000
Bad debts expense (SQUEEZED) 148,000
Write-off (120,000)
Recoveries 12,000
Allowance for bad debts (required allow.) P 190,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 3,500,000
Less: Allowance for bad debts (190,000)
Accounts receivable, carrying amount P 3,310,000
 PROS
Ø More accurate and scientific
computation of the allowance
for doubtful accounts.
Ø Presents fairly the accounts
Aging of receivable in the statement of
financial position at net
Accounts realizable value
Receivable
CONS
Ø Violates the matching process
Ø Time consuming if a large
Estimation of Doubtful Accounts number of accounts are
involved.
 AR Method or DEBIT BALANCE
Aging Method
If there is a debit
IN THE
balance in the ALLOWANCE
unadjusted allowance
for bad debts, the FOR BAD
amount of bad debts
expense is higher than DEBTS
the required ending
balance of allowance
for bad debts.
Percentage-of-
sales Method DEBIT BALANCE
It is possible that the
allowance could still IN THE
have a debit balance
despite recording bad ALLOWANCE
debts expense. In this
case, the entity shall
FOR BAD
revisit the process of DEBTS
estimating its bad
debts and adjust it to
reflect the updated
circumstances.
On January 1, 2025, MUSTANGS Company reported
a beginning balance of P400,000 in its allowance
for bad debts. During the year, accounts of
P450,000 were written-off and P35,000 were
recovered. Net credit sales amounted to
P10,000,000, while accounts receivable had
P4,200,000 balance as of December 31, 2025.
Required: Under each of the following independent
scenarios, determine the amounts of (a) bad debts expense
and (b) ending allowance for bad debts:
1. Estimated bad debts is 4% of net credit sales
2. Estimated bad debts is 6% of accounts receivable balance
3. Estimated bad debts is based on the aging of the
accounts receivable as follows:
Age Amount % Uncollectible
0-30 days P 2,500,000 3%
31-60 days 1,100,000 8%
61-120 days 400,000 20%
More than 120 days 200,000 50%
P 4,200,000
Scenario 1: Percentage-of-Sales Method

Bad Debts Expense = Net Credit Sales ×

Expected Uncollectible Accounts (in %)
Bad Debts Expense = P10,000,000 × 4%
Bad Debts Expense = P400,000
The ending balance of the allowance for bad debts can now
be determined as follows:
Allowance for bad debts, beginning P 400,000
Estimated bad debts expense 400,000
Write-off (450,000)
Recoveries 35,000
Allowance for bad debts, ending P 385,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 4,200,000
Less: Allowance for bad debts (385,000)
Accounts receivable, carrying amount P 3,815,000
Scenario 2: Accounts Receivable Method

Ending Balance of Allowance = Accounts

Receivable × Expected Uncollectible Accounts
(in %)
Ending Balance of Allowance = P4,400,000 × 6%
Ending Balance of Allowance = P252,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 400,000
Bad debts expense (SQUEEZED) 267,000
Write-off (450,000)
Recoveries 35,000
Allowance for bad debts (required allow.) P 252,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 4,200,000
Less: Allowance for bad debts (252,000)
Accounts receivable, carrying amount P 3,948,000
 Scenario 3: Aging Method
The ending balance for allowance for bad debts is
computed as follows:
% Allowance for
Age Bracket Amount
Uncollectible Bad Debts
0-30 days P 2,500,000 3% P 75,000
31-60 days 1,100,000 8% 88,000
61-120 days 400,000 20% 80,000
More than 120 days 200,000 50% 100,000
P 4,200,000 P 343,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 400,000
Bad debts expense (SQUEEZED) 358,000
Write-off (450,000)
Recoveries 35,000
Allowance for bad debts (required allow.) P 343,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 4,200,000
Less: Allowance for bad debts (343,000)
Accounts receivable, carrying amount P 3,857,000
Changes in the estimate of the bad debts
amount shall be accounted for prospectively
(only the current and future periods are to be
affected).

Previously recognized amounts in the prior

periods shall not be adjusted for the change in
estimate. Instead, the amount of adjustment
shall be reflected in the current period's
bad debt expense amount.
CHANGES IN THE
ESTIMATE OF BAD DEBTS
BLAZING PHOENIX Company reported the following
amounts for the years 2024 and 2025:

2024 2025
Allowance for bad debts, beginning P 60,000 P ???
Write-off 40,000 55,000
Recoveries 15,000 18,000
Bad debts expense ??? ???
Allowance for bad debts, ending ??? ???
Accounts receivable, ending 2,000,000 3,000,000
Over the past few years, the company estimates that
4% of its accounts receivable will become
uncollectible. However, for the year 2025, the
Company relaxed its credit standards by granting
more credit to their customers. As a result, the
amount of expected bad debt expense increased to
6% of its accounts receivable balance.

Required: From this information, determine

the amounts of bad debts expense and ending
allowance for bad debts for 2024 and 2025.
Year 2024:

Ending Balance of Allowance = Accounts

Receivable × Expected Uncollectible Accounts
(in %)
Ending Balance of Allowance = P2,000,000 × 4%
Ending Balance of Allowance = P80,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 60,000
Bad debts expense (SQUEEZED) 45,000
Write-off (40,000)
Recoveries 15,000
Allowance for bad debts (required allow.) P 80,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 2,000,000
Less: Allowance for bad debts (80,000)
Accounts receivable, carrying amount P 1,920,000
Year 2025:

Ending Balance of Allowance = Accounts

Receivable × Expected Uncollectible Accounts
(in %)
Ending Balance of Allowance = P3,000,000 × 6%
Ending Balance of Allowance = P180,000
The bad debts expense is computed as:
Allowance for bad debts, beginning P 80,000
Bad debts expense (SQUEEZED) 137,000
Write-off (55,000)
Recoveries 18,000
Allowance for bad debts (required allow.) P 180,000

The carrying amount of the accounts receivable as of

December 31, 2025 is computed as follows:
Accounts receivable P 3,000,000
Less: Allowance for bad debts (180,000)
Accounts receivable, carrying amount P 2,820,000
 ESTIMATING THE
PERCENTAGE OF
BAD DEBTS
As a starting point, entities will usually use the
previous amounts reported for accounts
written off and recoveries during prior
periods.
This historical information is adjusted to
reflect the expected future changes in the
circumstances.
RMYC Company, an entity that estimates its bad
debts by using the percentage-of-sales method,
reported the following information related to past
four years:

Year Credit Sales Write-offs Recoveries

2021 P 8,000,000 P 200,000 P 40,000
2022 10,000,000 300,000 60,000
2023 16,000,000 500,000 -
2024 14,000,000 400,000 140,000
Every year, the Company estimates the percentage
based on credit sales by relating the cumulative net
write-offs to the cumulative credit sales during the
previous three years. The effects of future expected
changes are deemed to be immaterial.
During 2025, the Company has written off accounts
amounting to P360,000 and recoveries amounting
to P70,000. Credit sales amounted to P15,000,000.
Allowance for bad debts at the beginning of the year
amounted to P930,000.
Required: From this information, determine
the amounts of bad debts expense and
ending allowance for bad debts.
The percentage to be multiplied to the credit sales
for the year 2025 shall be determined as follows:

𝟑𝟎𝟎𝒌 − 𝟔𝟎𝒌 + 𝟓𝟎𝟎𝒌 + (𝟒𝟎𝟎𝒌 − 𝟏𝟒𝟎𝒌)

% =
𝟏𝟎𝑴 + 𝟏𝟔𝑴 + 𝟏𝟒𝑴
%-of-sales rate = 2.50%

NOTE: The information related to the year 2021 shall

not be considered since it is beyond the three prior-
year period (2022, 2023 and 2024) prior to the year
2025.
Bad Debts Expense = Net Credit Sales ×
Expected Uncollectible Accounts (in %)
Bad Debts Expense = P15,000,000 × 2.5%
Bad Debts Expense = P375,000
The ending balance of the allowance for bad debts can now
be determined as follows:
Allowance for bad debts, beginning P 930,000
Estimated bad debts expense 375,000
Write-off (360,000)
Recoveries 70,000
Allowance for bad debts, ending P1,015,000
 THE END
THANK YOU
INTERMEDIATE ACCOUNTING 1

Estimation of Doubtful Accounts