Overview of Adjusting Process

Adjusting process is inade in order to comply with the generally accepted

accounting principles regarding revenue recognition and matching principles.
Adjusting entries are adjustments used to bring the assets, liabilities,
revenues and expenses up-tc-date at the end of accounting period.
They are usually made at the cnd of the accounting period in order for
revenues to be recognized within the period they are earned and for
expenses to be recognized within the period they are incurred.

Acjusting entries are necessary to properly report the truthul net income or
loss ar the end of the accounting period on the statement of comprehensive
income, and to appropriatelv report the assets, liabilities, and owner's eguity
Financial Position.
at the statement date on the Statement of

Accounting utilizes "adjusting entries" at the end of an accounting period to

accounts that have
Split or separate mixed acccunts. Mixed accounts are
the end of the
Components of assets and expenses, or llability and income at
accounting period.
 Basic Adjusting Entries
The following basic adjusting entries are usuallv made at the end of the
period:

1. Accruals;
2. Prepayments;
3. Pre-collections;
4.. Depreciation and amortization;
5. Estimated uncollectible accounts;

6. Endíng inventory (Applicable to Merchandising and Manufacturing

Businesses); and
7. Bank account reconciliation.

Accruals

The term "accrual," as used in accounting, means to recognize (to accruel

revenue earned regardless of when it was collected, and to record expenses
incurred whether paid or not. This accounting practice is based on the
accrual-basis assumption of accounting.

Accrued Revenue

Accruing revenue means recognizing an income that is already earned but

not yet received. When an enterprise obtains legitimate clain over an
earnings, the income is reflected in the books of accounts by recordinga
debit to receivable and credit to income earned.

Examples of accrued revenues are services performed but not yet billed or
collected, or accumulating income due to passage of tine, as in the case ot
rent income and interest income. Rent income and interest income are
generally unrecorded because their earnings do not involve daily recording
In either case, however, at the end of a period they should be recorded to
avoid understatements of assets and revenues.

The format of adjusting entry to accrue revenues would be:

ONERAL JOURNAL 22
Paga Number
Date Descriptions P. Debit Credit

12/31Accrued (appropriate) receivable account XXXX

(Appropriate) Income account XXXX
To recognize revenue earned.
 Observe that the adjustment for accrued revenue increases
andthe revenue accounts. both the a9et

Accrued Expense
Aecruing expernse means recognizing an incurred expense that
unpaidby debiting accrued expense and crediting remains
accrued liability.
Normally, an accrued expenseof one
another Company because it rcsults Company
from the issame
the accrued
cause agrevenue
acerucdof
revençe,

Adjustments for accrued expenses are necessary to recognize the

1nrecorded expense that applics to the current accounting period and to
record the unrecorded obligations that exist at the SFP date. Therefore, this
adjustment incrcases both expenses and liability.
The format of adjusting entry to accrue expense is as follows:

GENERAL JOURNAL
Page Number 22
Date Descriptions PR Debit Credit

12/31 _(Appropriate) Expense account XXOX

Accrued (appropriate) liability account
To recognize expense incurred.

Illustration

On November 1, 20Ox, Nasundan Construction Supply issued to Buhangin

Supply a 6%, P120,000 note due in one year for payment of aggregate
products.

Initial journal entry:

The journal entry would be:
Adlysng Entrle
Books of Nasundan (makor) Books of Buhangin (payee)
120,000 Accounts receivable 120,000
Purchases
120,000 Sales 120,000
Notes payable

Adjusting journal entry:

entries in the books of
On December 31, 200x, the adjusting journal
Nasundan and Buhangin are as follows:
 Adius tingEntrles
Books of Nasundan (maker) Books of Buhangin (payee)
Accrucd interest
Interest expense 1,200 receivable 1,200
Accrued interest Interest income
payable 1,200
I,200

Notes:
1. The accrued interest pertains only to 2 months of iability or
November and December, as the case may be It is computed as tollows: earnings for
Principal amount
Multiply by annual interest rate
Interest per year
P120,0006%
P
Multiply by fraction of months incurred in a year 7,200
Accrued interest. 2/12
2 n the financial reports of Nasundan, the interest expense of P1,200 is to he
PL200
reported as financing cost in the Statenent of Comprehensive Incorne and tha
PI,200 acerued interest payable is a current liability in the SFP (Statement of
Financial Position). On the other hand, Buhangin will report the P1,200 accned
interest receivable as current asset in the SFP and the interest income as other
revenue in the statement of comprehensive income.
3. If the adjustments were not made, the following effects will be found in the
books of accounts:
Nasundan Buhangin
Expenses Understated No effect
Revenue No effect
Net income Overstated
Understated
Asset No effect
Understated
Liability Understated
Understated No effect
Owner's equity Overstated Understated
Prepayments
Prepayments are advanced payments of business
expenses or supplies to
be used in a business operation. These items may be recorded initially as
prepaid assets or prepaid
ine (eg. insurance and expenses, which expire either with the passage of
rent), or through usage or
supplies). con8umptlon (e.g.
Prior to the preparation of the SFP, the
partly expense. f adjustment is not made,prepayment is partly asset and
the financial records contain
assets that are overstated and expenses that are
At the date of the understated or vice-versa.
financial statements, accountants
adjusting entri1es to separate the expense portion from make
the
the necessary
asset portion o!
the mixed accounts.
Asset Method of Recording Prepayments
The asset method or SFP (balance sheet) method of
initially records the advanced payments recording
as asset. Thus prepaymentS
at the end of an
aocounting period, the assct is overstated.
of such asset should be recorded as Accordingly, the expired portion
Cxpense.
The format of adjusting entry for the prepayment asset method is as follows:

GENERAL JOURNAL
Page Number 22
Date Descriptions PR Debit Credit
12/31 (Appropriate) Cxpense account XXX
(Appropriate) Prepaid assct account XXXX
To adjust the expired portion of
asset account.

Expense Method of Recording Prepayments

The expense method or SCI method of recording prepayments initially
records the total amount of advanced payments as expense. Thus, at the
end of the accounting period, the expense is overstated. Accordingly, the
portion of such expense that has nct yet expired should be recorded as
asset.

The format of the adjusting entry for prepayment expense method would be:

GENERAL JOURNAL
Page Number 22

Date Descriptions PR Debit Credit

12/31 (Appropriate) Prepaid asset acccunt XXXX

{Appropriate) Expense account XXXX

To adjust the unexpired portion of

eXpense account.

Illustration
On October 31., 200x. Joe Marts Enterprise paid in advance
an insurance
recording of
Premium for Pl2;000 covering a period of one year. The initial
Lne prepayments would be as follows:
Initial journal entry:
The initìal journal entrv on October 31, 200x would
be:
General Jour nal
Expenso Method
Asset Method
Insurance expense 12,000
Prepaid insurance 12,000
Cash
Cash 12,000 12,000

On December 31, 200x, when the financial statements are about to be

affect
prepared, the following analysis shall be made to the adjusting
journal entry:
Analysis:
Asset Method Expense Method
Required prepaid insurance Required insurance expense
(P12,000x 10/12) P10,000 (P12,000 x 2/12) P 2,000
Recorded prepaid insurance (12,000) Recorded insurance expense L12,000)
Decrease in prepaid insurance (P2,000) Decrease in insurance expense P10,000)
Adjustiag journal entry:
On December 31, 200x, the appropriate adjusting entries would be:
Goneral J o urn al
Asset Method Expense Method
Insurance expense 2,000 Prepaid insurance 10,000
Prepaid insurance 2,000 Insurance expense 10,000

Notes:
1 As of December 31, 200x, there are ten months unexpired portion of the
P12,000 prepayments. The payment starts on October 31, 200x, if the fnancial
statement is made on December 31, 200x, the expired portion should be twO
months amounting to P2,000 and the unexpired portion is P10,000.
Asset Method
Recorded prepaid insurance P12,000
Expense MethÍd
Recorded insurance expense P12,000
Less: Expired portion Less: Unexpired portion
(P12,000 x 2/12) 2.000 (P12,000 x 10/ 12) 10.000.
Required prepaid insurance Required insurance expense
(P12,000 x 10/12) P10,000 (P12,000 x 2/12) P2.000
In the casc of asset method, the required prepaid insurance should be P10,000
It is there•ore necessary to reduce the prepaid insurance account by
because it is overstated by P2,000. The cornesponding debit to crediting insurarc
expense account should be P2,0O00 to etect the expired portion.
 l tae case oi expense method, the required inurance expense ia only two
months amounting to P2,000. I is therefore necessary that the insurance
exDense account be reduced by P10,0O0 because initially it was recorded at
PJ2,00O. The corresponding debit should be made to prepaid insurarnce to
affect the asset portton ot prepaynents. An analysis using a diagram is shown
below:

Statement of Financial
Expire portion
Position Date
2manths
A
P2,000

PI0,000

Unexpired portion 10 months

2. Note that even ií the two methods are different from each other, the final
adjusted amont of the prepaid insurance and insurance expense is the same.
Hereunder are the T-accounts reflecting the entries:

Asset Method - Prepayment Expense Method - Prepayment

Prepaid Insurance Prepaid Insurance

Debit Credit Deblt Credit
12.000 12/31 2.000 12/31 10,000
1031
12/31 10.000

Adjusted balances

Insurance Expense Insurance Expense

Credit Deblt Credit
Debit
10/1 12,000 12/31 10,000
12/31 2,000
12/31 2,000

Adjusted balances

method and expense method should be used alternatively, In other

esset expense method should not be used
wOas, I assct method has been used, the
anymore for consistency purposes.
Pre-collections
rcveriue) are advance
as deferred
Pre-collections (also knowncustomers. These cash
collections
business revenues fron are not vet carncd by the buSiness
payments by the customers
colectiGTs
The cash collections may be recoguized initially as revenue or liabity
recorded as revenue, there is an Overstatement of revenue becau3e tie

process has not been petformed, and if recorded as liab:lity

Carning revenue because at the end o
an understatement of
might be
accounting period, a portion of the advanced collection may hae been
carned.

For this reason, there is a revenue-liabiiity account relationship that ests

in pre-collection. Accordingly, at the date of the financial staterneTts
accountants make the necessary adjusting entries to separate the reever.e
portion from the liability portion of the pre-collected amount.

There are two methods of recording pre-collections, namely: the iabity

method and the revenue method.

Liability Method of Recording Pre-collection

The liability method (also called Statement of Financial Position Methoci f
recording pre-collection initially records the advance collection as liabilir
using an "unearned revenue account." At the end of the accounting perod.
the liability is overstated when a portion of the collection has been earned.
Logically, it is necessary to reduce the recorded liability and recognize the
portion of revenue earned during the period.
The format of adjusting entry for pre-collection liability method would be

GENERAL JOURNAL
Date Page Number
Deecriptions PR Debit Credit
12/31 (Appropriate) Unearned revenue account XXXI
(Appropriate) Revenue account
To adjust the carned portion of
liablligy acoouAt.

Revenue Method of Recording Pre-collection

The revenue method or SCI method of
records the entire amount of the advanced collection recording
pre-collection initialy
as income earned
Thus, at the end of the accounting period, the revenue account is Overstated
when a portion of the collection has not the
related revenue accoUnt must be reducedbeen
and fully
the earned. Accordingly,
corresponding unearned
revenue must be recognized.
 The format of the adjusting entry to record the revenue method of pre-
collection is as follows:

GENERAL JURNAL
Fage NunN ber
Date Descriptons PR Debit Credit
12/31 (APpropriate) Revenue account XXXX
(Appropriate) Uncarned revenue account
To edjust the uncarncd portion of
revenue accOunt.

Illustration

On October 1, 200x, Kings Court Pension House received in advar1ce a rent

income of P60,000 covering a period of one year.
laltlal journal ontry1
The initial journal entry on October 1, 20Ox would be:

General Journ al
Llability Method Revenue Method
Cash 60,000 Cash 60,000
Unearned rent 60,000 Rent income 60,000

On December 31, 200x, when the financial statements are about to be

prepared, the following analysis shall be made to affect the adjusting
journal entry:

Analysis:
Liability Method Revenue Method
Required uneanned rent Required rent income
(P60,000 x 9/12) P45,000 (P60,000x 3/12) P 15;000
Recorded unearned rent, (60,000) Recorded rent income L60,000)
Decrease in unearned rent (P15,000) Decrease in rent income (P45,000]

Adjusting journalentry:
The appropriate adjusting entries should be:
Adlus tingEntrles
Revenue Method
Llability Method
Uneaned rent
Rent income
15,000
15,000
Rent income
Unearned rent
45,000
45,000
 Notes:
December 31. 200x, there are nine months unearned
1. As of
P60,000 advanced collection. The cffectivity of the collection starts
poort
On
ion
200x. If the financial statement is made on December
Pl5,000
31,
and 200x, theOctober \,

uncameearned
portion should be thrce months amounting to the
portion should be P45,000.
Liability Method Revenue Method
Recorded unearned rent P60,000 Recorded rent income
Less: Earned (P60,000 x 3/12)
Required unearned revenue
15,000 Less: Unearned (P60,000 x 9/12)
Required rent income
P60,45,000
liability (P12,000 x 9/12) P45,000 (P60,000 x3/12)
In the case of liability method, the required unearned revenue (liability)
PIS000
be P45,000. It is therefore necessary to reduce the unearned shouldby
revenue account
debiting it to P15,000. The corresponding credit shouid be PI5,000 to
income account to effect the earned portion of collection.
In the case of revenue method, the required rent income is only three months
amounting to P15,000. It is therefore necessary that the rent income account
shall be reduced by P45,000 because initially it was recorded at P60.000.
The corresponding credit should be made to unearned revenue
(liabilitv)
amounting to P45,000 to record the unearned portion of collection. An analysis
using a diagram is shown below:
Statement of Fnancial
Earned portion = 3 months Position Date

L i a
P15,000
i i t

Income P45,000

Unearned portlon =9 months

2. Note that even if the two methods are opposites, the final adjusted amount of
the unearned rent and rent income are the same

For purposes Qf analysis, here are the

T-accounts reflecting the entries:

Llablity Method -Pre-collection Revenue Method

Pre-collectlon
Unearned Rent
Deblt Credit Unearned Rent
Doblt Credit
12/31 15.D0O 10/31 60.000
43,000
12/31 45,000 12731

Adjusted balances
 Method - Pre-collectlon
Liabllty Revenue Method Pro

Rent lncome
Ront Income
Credt CredIt
Debit
12/31 15,000 12/31 10/31 60,000
45,000
12/31 15,000

Depreciaticn

Depreciation is the allocation of the cost (depreciable cost) of tangible

nssets used in business over its estimated useful ife in years in accordance
systematic and rational allocation expense principle of accounting.
withthe
or
subject to depreciation are property, plant and equipment and
The assets
ixed assets (tangible assets,
except laid) such as building, furniture
fixtures, and equipmment which are used in business but not recorded as
inventory tor sale.

several years to the business,

Since thev are expectecd to provide benefit over gradually expensed
ther should first be recorded as assets and their cost is is
depreciation expense." It
over its useful life. This used portion is called of
treated as one of the items of operating expenses in the Statement
Comprehensive Income at the end of the period.
depreciation expense would be:
The fomat toadjust provision for
GENERAL JOURNAL
Page Number 22

PR Debit Credit
Date Doscriptions
XXXX*
12/31 Depreciation expense
Accumulated depreciation -(Appropriate)) XXXX
Fixed asset account
depreciation of fixed
To adjust for the
asset for the period.

computing depreciation expense are straight-lne,

eof the methods in
double declining methods. For the basic
and other
Sum-cf-years digit, declining
straight-line (SL) method is discussed. The in
aCcOunt
nethodsing,are discussed
however, only courses, particularly
in higher accounting
ermediate financial accounting
 follows:
Ihe formula for Straight-Line (S)method is as

Acquistion COst -
Annual depreciation expense (SL) Estimated useful Sal1ifevinaqeyearsvaluo
Notes:
1. The formula is expressed as an annual depreciation. Hence, as a
the fixed asset is acquired duing the intcrim period of the year.
onlgener
y aal ule,
the annual depreciation shall be reported as depreciation expense.
porion
Acquisition cost is the historical cost. It usually includes the
and other incidental cost to acquire and prepare the fixed asset for purchase
its pice
3
Use.

Salvage value refers to the scrap or residual value of the fixed

intended
of its useful life. asset at the enA
4. Estimated useful life is the estimated economic life of the fxed asset.
Illustration

On January 1, 200x, Computromix acquired a computer with an invoice

price of P47,000, and transportation cost and installation cost of P1 0n
and P2,000, respectively. The computer iS intended for office use. It was
estimated to have a useful life of five years and a salvage value of P5,000.

Initial journal entry:

The journal entry in acquiring the computer is as follows:

GENERAL JOURNAL
Date
Page Number 22
200x Descriptions PR Debit Credit
01/01 Office equipment 50,000
Cash (or other appropriate account) 50,000
Acquisition of computer or cffice use,
computed as follows:
Invoice price P47,000
Add: Incidental costs:
installation cost P 2,000
Transportation cost l000 3,000
Total acquisition costs
P50,000

Note: Installation and transportation costs are capitalized because these are directly
related in making the eqipment ready for its intended use.
Adjusting journal entry:
The adjustment as of December 31, 200x would be:
GENERAL JOURNAL. Pago Number 22
Dato Descriptions PR Debit Credlt
12/31 Depreciation cxpensc 9,000
Accum. depreciaion - Office cquipment 9,000
Acquisition of computer for office usc,
computed as follows:
Total acquisition costs P50,000
Less: Salvage valuc 5,000
Depreciable cost P45,000
Divide by estimated economic life (years) 5
Annual depreciation expense P 9,000
Notes:

1, The depreciation expense account shall be reported in the Statement of

Comprehensive Income as an operating expense. The accumuiated depreciation
- office equipment account shall be treated as a Contra-asset account
(deduction) of the office equipment in the Statement of Financial Position.
Hence, the office equipment shall be reported in the Statement of Financial
Position at itsbook value as follows:
Ofice equipment (computer) - at cost P50,000
Less: Accumuiated depreciation - office equip1nent 9,000
Net book value P41,000
2. The book value of fixed asset inchudes the remaining depreciable cost and
residual valuc of the asset.

Amortization

Amortization is the allocation of the acquisition costs of an intangible asset

over its legal or accounting estimated life. An intangible asset is an asset
that has no physical existence but provides the owner some selling and
operational advantages over competitors. Examples of intangible assets are
goodwil,franchise, copyright, patent and trade names.

An intangible asset has no salvage life unless a third party is committed to

purchase it. If the intangible asset ceases to provide coimpetitive advantage
to the owner, it must immediately be written off.

As a rule, goodwill that is internally developed is expensed immediately but

the books of
I acquired through purchase, goodwill is recorded as assets in
accounts.
Below is the format for adjusting entry to record the amortization:
 GENERAL JOURNAL
Page Nun1ber
Date PR Debit
Descriptions
XXXX
Credit
12/31 Amortization expense
(Appropriate) Intangible asset account XXXX
To adjust for the amortization of
intangible asset.

The formula of amortizing intangible assets 1s

Annual amortization expense Acquistion cost

Legal life or useful life

ilustration
At the beginning of the calendar year 200x, an entity
acquired an exclusiye
right to produce and sell its internally developed edible
patent for this product, the total cost of P150,000 was lipstick. To obtain
is expected to provide the business the exclusive incurred. The patent
be
benefit for 10 years, and to
recorded as capitalized expenditure.
Initial journal entry:
The initial recording of intangible would be:

GENERAL JOURNAL
Date
200x Page Number 1
Descriptions PR Debit Credit
01/01 Patent
Cash 150,000
150,000
To recordacquisition of patent.

Adjusting journal entry:

The adjusting entry at December 31, 200x would be:

GENERAL JOURNAL
Date 1
200x Descriptions Page Number
PR Debit Credit
12/31 Amortization expense
Patent 15,000 15,000
To record amortization of patent.
 After the adjustiment, the composition of the original cost of patert will te:

Expired Portion:
Arnortization sxpenso P15,000
Patent P150,000

Unoxpirgd Porion:
Patent P135,000

Estimated Uncollectible Accounts

When account3 reccivables are already long overdue, some portion will be
adiusted as "uncollectible accounts," "bad debts", or "doubtful accounts."
This adjustment is necessaiy in order to separate the losses (uncolectíble)
frorn realizable asset to conform to the accounting principle that an itern 19
qualified as asset if it could provide present or potential future benefits.
Accordingly, if claims are already long overdue and uncollectible, such
amounts could no longer provide present and future benefits. Logically, the
uncollectible amounts shall immediately be expensed.
Moreover, the prudence convention provides that the business should
anticipate losses i1.order not to overstate assets as reported in the SFP.

Determining uncollectible account expenses depends on the intention for

which the financial statement prepared is submitted. f the financial
statement is for BIR purposes, the only allowed method is the direct method.
But if the financial statement is for general-purpose reporting, the
allowance method shall be used.

Direct method of recording uncollectible accounts records bad debts

expense oniy when a specific accounts receivable is ascertained to be
worthless. This method is also known as "actual write-off method" because
the worthless accounts receivable is removed from the books of accounts bv
writing it off.
On the other hand, aliowance method records bad debts expense even if
the uncollectible is only estimated Thismethod does not remove the
amount of deemed uncollectible account, but only provides for allowance to
reduce it at the end of the period.
transactions of the
To compare the two methods, assurne the following
Highland Enterprises:
 BASIC ACCOUNTING

306

nccount, P50,000,
Totalsales on
unecollectible, P6,000.
to be
AmOuntestinated
d.
ascertained to be
worthless and was eventually writ en.
3,. Actual amount
ofl, P2,000. follows:
transactions are as
the above
The entries to record
account
1. To record sales on
General Journal
Allowance Method
Direct Method Accounts receivable 50,000
Accounts receivable 50,000
50,000 Sales 50.000
Sales

amount uncollectible
2. To record estimated
General Journal
Allowance Mathod
Dlrect Method Bad debts expense 6,000
No entry Allow. for bad debts 6,000

ascertained to be worthless
3. To record actual amount
General Journa l
Allowance Method
Direct Method
Allow. for bad debts 2,000
Bad debts expense 2,000 Accounts receivable 2,000
Accounts receivable 2,000

Notes:
Nojournal entry is made when the amount
uncollectibie is only estimated under
1. debts expense
the direct method. The Tax Code provides- that e charge to baddeductibility from
constitute
due to estimated uncollectible receivable does not
business gross incomne.
To be deductible, the claim must be ascertained worthless and the
corresponding receivable should have been written off within the taxable year.!
Under the dtreet nAethod, the accounta redelvable to ye reported in the
Statement of Financial Position is P48,000, and the bad debta expense in the
Statement of Comprehensive Income is P2,000.

2 debts
Under are
the allowance method, adjusting entry is made even if the computed bad
only estimated. However, the allowance shall be reduced by the
amount ascertained as worthless.

Under this method, the bad debts expense to be reported in the Statement ai
Comprehensive Income as an operating expense is P6,000. The allowance tor
bad debts is a contra-asset account against the related accounts receivable. The
No. 2.
1Sec. 34 E, NIRC; Sec. 102, Rev. Regs.
 p46.000 net accounts receivable is reported in current assct
Statement of Financial Position as follows: portion of the
Accounts receivnble
Less: Allowance for bad debts PS0,000
1.000 P46,000
For purposes oi analyS18, A fWo-nioney
deternination of P4,000 allowance for badcolumn
debts, ledger is shown to present the
as follows:

ouot
Allowance for Bad Debts
No. 140
Deblt
Credlt
(3 Written off 2,000 (2) Estimated 6.000
Adjusted balance 4,000

The allowance method is a conservative

approach of reporting income and
expenses. Likcwise it supports the acerual method of accounting.
Recovery of Accounts Previously Written Off
If accounts previoUsly writtern off are recovered, the customer's acCOunt
should be first recharged to re-establish the customer's credit standing with
the business enterprise.

The collection is simply recorded by debiting cash and crediting accounts

receivable.

Illustration

Assume that after a year, Highland Enterprise was able to recover P1,500 of
the accouNtS previously written off. The appropriate journal entries would
be:

1. Torecord the recharging of accounts

General Journ al
Direct Method Allowance Method
Accounts receivable 1,500 Accounts receivable 1,500
Recovery of accts. Allow. for bad debts .1,500
written off 1,500
(income)

2. To record collection of accounts

General Journal
thethod Allowance Method
Direct Cash 1,500
Cash 1,500
Accounts receivable 1,500 Accounts receivable 1,500
 Notes:
1 Under the direct method, the credit to bad debtS Cxpense may be made if the
The recOvery of
recovery is made during the year of write off. Statcmnent
written off is treated as other income in the
Income. If the amount is immaterial, a credit to
of
miscellaneous accounts
Comprehensive
an appropriate account. incone still
is

For accounting purposes, the allowance method is the

2
unless otherwise stated. The alternative journal entry for preferred approachof
accounts previously written off is as follows: recovery
Genoral Journal
Direct Method Allowance Meth od
Cash 1,500 Cash 1,500
Recovery of accts. Allow. for bad debts
Written off 1,500 1,500
(income)

Methods of Estimating Doubtful Accounts

Accountants usually estimate doubtful accounts by using the following
methods:
1. Statement of Comprehensive lncome (SCI) Method
a. Percent of sales (% of Sales)
2. Statement of Financial Position (SFP) Methods
a. Percent of accounts receivable (% of AR), or
b. Aging the accounts receivable (AAR).

Treatment of Computed Amount

Methods Computed Amount Category of Account
% of Sales Doubtful account expense SCT as operating expense
% of AR Ending balance of allowance
for doubtful account
SFP as contra-asset account

AAR Ending balance of allowance

for doubtful account
SFP as contra-asset account

Percent of Sales

This method apportions a percent of sales during a given period as

estimated uncollectible accounts. Percerit of sales mnethod is generally used
in preparing interim iinancial reports.
Illuetration

Assume the following data from Lowlnnds Enterprises Aa of October 31,

200x:

Sales P3,000,000
Accounts receivable 700,000
Alowance for doubtful accounts 3,000

he accountant estimated that 1% of sales Are deemed uncollectible. The

bad debts expense is computed As follows:

Sales P3,000,000
Multiply by percentage 1%
Estimated doubtful accounts P30.000

The adiusting entry wouid be:

GENERAL JOURNAL
Pago Number 22
Debit Crodit
Date Descriptions
12/31 Doubttul accounts expense 30,000
30,000
Allowance for doubtful accounts
To record provision for uncollectible
accounts.

Notes:
allowance for uncollectible accounts
1. After effecting the adjustment, the total net accounts receivable is P667,000
becomes P33,000, (P3,000 + P30,000). The Position as follows:
Financial
and is presented in the Statement of
P700,000
Accounts receivable
33,000 P667,000
Less: Allowance for doubtful accounts
is not
accounts under the percent of sales rnethod
2. The allowance for doubtful percent of accounts
still be revised if the
the required allowance. It could receivable method is used.
receivalble or the aging of accounts

Percent of Accounts Receivable

apportions a percent of adjusted ending accounts receivable as
This method
estimated uncollctible accounts.
year-end
is generally used in preparing computed
Percent of accounts receivable allowance for doubtful accounts
inancial reports. The amount of as a contra
this method is the required allowance to be reported
using
account against receivable.
Illustration
as follows:
High-low Enterprise has the following data
Sales
Accounts receivable P3,0700,00,000000
Allowance for doubtful accounts
determined that
33,000
Assume that on December 31, 200x. High-low five perCent
uncollectible.
(5%) of accounts receivable is deemed
follows:
Thecomputation of the required allowance is as
Accounts receivable, ending
MultipBy by percentage of uncollectible accounts
P700,000
5%
Required allowance for doubtful accounís P_ 35,000
The adjusting entry would be:

GENERAL JOURNAL
Page Num ber 22
Date Descriptions PR Debit Credit

12/31 Doubtful accounts expense 2,000

Allowance for doubtful accounts 2,000
Provision for uncollectible accounts,
computed as follows:
Required allowance (P700,000 x 5%) P 35,000
Less: Recorded allowance 33,000
Increasse in allowance P2,000

Notes:
1 The recorded allowance for doubtfui accounts is only P33,000, Therefore, there
is aneed to increase it by P2,000 to meet the required allowance of P35.000.
2. The accounts receivable net of allowance is P665,000.: It is shown in the
Statement of Financial Position as follows:

Accounts receivable
Less: Allowance for doubtful account8 P700,000
35.000 P665.Q0Q

Aging of Accounts Receivable

This mnethod calculates a more accurate and scientific
conmputation of the
allowance for doubtful accounts because it is baSed on the classified past
due accounts receivable covering a particular period, which is multiplied by
its speçific estimated uncollectible percentage based on the enterprise's
experience of doubtful accounts.