DOUTBFUL ACCOUNTS EXPENSE
For a better management practice, managers should brace themselves for the possibility that they may not collect 100% of their collectibles. The accounting expression for the doubt on these outstanding balances is what we call "Doubtful Accounts."
From Aging of Accounts Receivable
Illustration:
C, a creditor, has categorized its Accounts Receivables into two and their rate of uncollectibilities as:
1. New receivables (1 month-old), 1%
2. Old receivables (beyond a month-old), 3%.
According to the average experience of C, new receivables hardly fail (1% only per historical average). There would only be the rarest occasions when debtors declare bankruptcy.
However for Old receivables, C has experienced in the past three years an average of 3% uncollectibility, that is, when Accounts Receivable remain unpaid over and beyond a month, 3% already fails to settle with C. C has learned his lesson that for this accounting period, he will consider 3% as a loss, although he wishes the chance to still collect everyone of these receivables. C, therefore, does not remove the receivables from the book until the doubt of uncollectibility is absolutely confirmed but only establishes an allowance for it.
C has the following peso receivables according to ages:
New receivables - P1,000,000.00
Old receivebles - P1,000,000.00
The doubtful accounts are:
P1,000,000.00 x 1% = P10,000.00
P1,000,000.00 x 3% = P30,000.00
=
P40,000.00.
The journal entry for the doubts on accounts is:
Doubtful Accounts Expense - P40,000.00
Allowance for Doubtful Accounts - P40,000.00
Doubtful Accounts Expense (Expense Account)
Allowance for Doubtful Accounts (Contra-Asset Account)
DOUTBFUL ACCOUNTS EXPENSE
As Percentage of Sales
Illustration:
C had a total sales of P1,000,000.00 for the month based on his experience, 1% of monthly sales become uncollectible.
The journal entry for the doubts on accounts is:
Doubtful Accounts Expense - P10,000.00
Allowance for Doubtful Accounts - P10,000.00
Doubtful Accounts Expense (Expense Account)
Allowance for Doubtful Accounts (Contra-Asset Account)
DOUTBFUL ACCOUNTS EXPENSE PRESENTATION
Doubtful Accounts Expense, also known as Bad Debt Expense, is presented in the operating expenses section of the income statement, typically under selling, general, and administrative expenses (SG&A) or as a separate line item under "Provision for Doubtful Accounts" if the company highlights it.
It represents the estimated uncollectible accounts receivable for a period, following the allowance method in accrual accounting. It reduces net income but does not directly affect cash flow until an actual write-off occurs.
ALLOWANCE FOR DOUTBFUL ACCOUNTS PRESENTATION
Allowance for Doubtful Accounts is a contra-asset account that reduces Accounts Receivable on the balance sheet. It is not presented as an expense on the balance sheet, as expenses appear on the income statement.
Accounts Receivable
Less: Allowance for Doubtful Accounts
= Net Realizable Value of Accounts Receivable
For example:
Balance Sheet (Partial)
Assets:
-
Accounts Receivable: ₱100,000
-
Less: Allowance for Doubtful Accounts: (₱5,000)
-
Net Accounts Receivable: ₱95,000