UNIT 6

Bad Debts And Provision For Doubtful Debts

Copyright 1995 by Thames Management Centre International. All right reserved. No part of this lecture notes may be reproduced in any form or by any means, without the permission in writing from Thames.

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PRINCIPLES OF ACCOUNTING BA212

6.1 Bad Debts

Bad Debts are

a. Customers’ debts that are irrecoverable

b. Losses to the company

c. On the debit side

d. Transfer to P/L Account under Expenses

Dr. Bad Debts A/c (P/L A/c) Cr. Debtors’ A/c

Example 1

Two of your debtors, A /B Co. who owes you $200 and C/D Co. who owes you $100, went bankrupt. While A/B Co. can only afford to pay 10% of what he owes you, C/D Co. cannot pay a single cent. Here’s how you record into your ledger and P/L Account.

Answer to Example 1

A and B Account

Date Particulars Amt Date Particulars AmtBalance b/d 200 Cash 20

Bad Debts 180200 200

C and D Account

Date Particulars Amt Date Particulars AmtBalance b/d 100 Bad Debts 100

Bad Debts Account

Date Particulars Amt Date Particulars AmtA & B Co. 180 Transfer toC & D Co. 100 P/L A/c 280

280 280

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BA212 PRINCIPLES OF ACCOUNTING

Profit & Loss Account

Gross Profit xxx

Less Expenses

Advertising xxxBad Debts 280

Net Profit xxx

6.2 Provision For Doubtful Debts (Provision for Bad Debts)

Customers’ debts that are uncertain of being recovered. It is a general provision on total debtors in the books.

Dr. P/L A/c Cr. Provision for Doubtful Debts A/c

Example 2

1st Year Debtors - $5,00010% Provision for Doubtful Debts

Answer to Example 2

Ledger:

Provision for Doubtful Debts Account

Date Particulars Amt Date Particulars AmtBalance c/d 500 P/L A/c 500

Balance b/d 500

Trading, Profit & Loss Accounts:

Gross Profit xxxx

Less Expenses

Provision for Doubtful Debts 500Net Profit xxxx

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PRINCIPLES OF ACCOUNTING BA212

Balance Sheet:

Current Assets

Cash-in-hand xxxClosing Stocks xxxDebtors 5,000Less Provision for bad debts (500) 4,500

xxxx

Example 3

2ND YEAR DEBTORS $8,000 - Increase in debts, therefore increase in provision.

(10% Provision for Doubtful Debts)

Answer to Example 3

Ledger:

Provision for Doubtful Debts Account

Date Particulars Amt Date Particulars AmtBalance c/d 800 Balance b/d 500

P/L A/c * 300800 800

Balance b/d 800

* Since $500 had been set for the previous year, we only need to take out another $300 to complete the 10% provision for $800.

Trading, Profit & Loss Accounts:

Gross Profit xxxx

Less Expenses

Provision for Bad Debts 300 (We only deduct what we fork out this year)

Net Profit xxxx

Balance Sheet:

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BA212 PRINCIPLES OF ACCOUNTING

Current Assets

Cash-in-hand xxxClosing Stocks xxxDebtors 8,000Less Provision for Bad Debts

(800) 7,200

xxx

Example 4

3RD YEAR DEBTORS $4,000 - Decrease in debts, therefore decrease in provision

(10% Provision for Doubtful Debts)

Answer to Example 4

Ledger:

Provision for Doubtful Debts Account

Date Particulars Amt Date Particulars AmtP/L A/c * 400 Balance b/d 800Balance c/d 400

800 800Balance b/d 400

* Since there is a decrease in provision, the outstanding will be added back into the Gross Profit.

Trading, Profit & Loss Accounts:

Gross Profit xxxxAdd Decrease in Provision for Doubtful Debts 400

xxxxLess Expenses

Advertising xxxxTransport xxxxNet Profit xxxx

Balance Sheet:

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PRINCIPLES OF ACCOUNTING BA212

Current Assets

Cash-in-hand xxxClosing Stocks xxxDebtors 4,000Less Provision for Bad Debts (400) 3,600

xxx

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BA212 PRINCIPLES OF ACCOUNTING

6.3 Exercise

Question 1

It is decided to maintain the provision for doubtful debts in the books of B. Wilson & Co. at 5% of the Sundry Debtors. The present provision stands at $120. At 31 December, the Sundry Debtors amount to $3,100.

Required:

Give the journal entries and show the Ledger Accounts to carry out this decision, including the Balance Sheet.

Question 2

Tee is a trader in second hand goods. At the end of the financial year ended 31 December 19x6, the sales ledger listing shows a total amount of $45,000. A detailed analysis of the listing shows that one of the debtors owning $5,000 has since been declared bankrupt. In addition some of the debts outstanding has remained unpaid for several months. As such, he has decided to provide provision on doubtful debts 10% on the remaining debtors.

Required:

(a) Calculate the amount of provision for doubtful debts.

(b) Prepare an extract of the entries to be shown in both the Profit and loss account and the Balance Sheet for the year ended 31 December 19x6.

Question 3

Assuming Tee’s total debtors for the year ended 31 December 19x7 amounted to $80,000. Included in the debtors amount, another debtor owing $10,000 has since closed down its business. It is Tee’s policy to continue to provide provision for the doubtful debts on the remaining debtors.

Required:

(a) Calculate the amount of provision for doubtful debts required for the year ended 31 December 19x7.

(b) Show the respective entries in both the Profit and Loss Account and Balance Sheet as at 31 December 19x7.

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