Bad debts and Provision for Bad debts
Feb 20, 2016
Bad debts and Provision for Bad debts
Bad Debts
• When the firm finds that it is impossible to collect a debt, that debt should be written off as a bad debt.
• Accounting Entries:Dr Bad Debts
Cr DebtorWith the irrecoverable amount of a
debt
Example• During the year, a company sold goods
for $2,000 to Mr. Lee, $1,500 to Mr.Wong and $300 to Mr. Wu.
• Mr. Lee and Mr. Wong paid the company $800 and $1,000 respectively
• Later, Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts.
• The company decided to write these off as bad debts.
Mr. Lee$ $
Bank 800
Mr. Wong$ $
Sales 1,500
Bank 1,000
Sales 2,000
2,000 2,000
Bad Debts 500
Balance c/d 1200
Mr. Wu
$ $Sales 300 Bad Debts 300
Bad Debts
$$
Mr. Wong 500 Mr. Wu 300
Profit & Loss Acc 800
800 800
1,500 1,500
B. Bad Debts Recovered
• Bad debts recovered refers to debts formerly written off to be recovered later.
Accounting entries
Dr DebtorsCr Bad Debts
Recovered
With the debt reinstated in the debtor’s account
Dr Cash/BankCr Debtors
With the amount received
Dr Bad Debts Recovered
Cr Bad DebtsORDr Bad Debts
RecoveredCr Profit and Loss
With the debt written off in this year to be recoveredORWith the debt written off in a previous year to be recovered
Example
• The following balances were part of the trial balance of Mr. Chan on 31 December 2006:$Debtors 10,000
Bad Debts 1,000 • During the year, Mr. Chan received $300 and
$1,200 from debtors, whose debts had been previously written off as bad debts in the current year and last year respectively. No entry has been made for these transactions
Bank2006 $
Dec 31 Debtors 1,500 Debtors
2006 $
Dec 31 Bal b/d 10,0002006 $
Dec 31 Bank 1,500Dec 31 B.D.R 300
Dec 31 B.D.R. 1,200 Bad Debt
2006 $
Dec 31 Bal b/d 1,0002006 $
Dec 31 B.D.R. 300Dec 31 P & L 700
Bad Debt Recovered2006 $
Dec 31 P & L 1,200
2006 $
Dec 31 Debtors 300Dec 31 Bad Debt 300Dec 31 Debtors 1,200
1,000 1,000
1,500 1,500
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit
Less: Expenses
Bad Debt 700
2006$ $
X Add: Bad Debt Recovered 1,200
C. Provision for Bad / Doubtful Debts
• A provision for bad and doubtful debts may be made when a firm thinks that there will be problems in recovering a debt.
Accounting entries
1. Increase in provision
Dr Profit and LossCr Provision for Bad
Debts
With the increase in the amount of provision for bad debts
2. Decrease in provision
Dr Provision for Bad Debts
Cr Profit and Loss
With the decrease in the amount of provision for bad debts
Increase in provision for bad debts Example
A firm decided to make a provision for bad debts at 10% of the debtors’ accounts which totaled $50,000 on 31 December 2004.On 31 December 2005, the debtors accounts totaled $60,000. The firm maintained the provision at 10% of its total debtors.
Provision for Bad Debts2004 $ 2004 $ Dec 31 Balance c/d 5,000
($50,000 * 10%)
Dec 31 Profit and loss 5,000
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit
Less: ExpensesIncrease in provision for bad debt 5,000
$X
$
Balance Sheet as at 31 December (Extract)
2004
Current Assets2004
DebtorsLess: provision for bad debt
50,0005,000
45,000
Provision for Bad Debts2004 $ 2004 $
Dec 31 Balance c/d 5,000
($50,000 * 10%)
Dec 31 Profit and loss 5,000
2005Dec 31 Balance c/f
($60,000*10%) 6,000
2005Jan 1 Balance b/d 5,000
Dec 31 Profit and Loss 1,000
6,000 6,000
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit
Less: ExpensesIncrease in provision for bad debt 5,000
$X
$2004 2005
$ $X
1,000
Balance Sheet as at 31 December (Extract)Current Assets
2004
DebtorsLess: provision for bad debt
50,0005,000
45,000
2005
60,000 6,000
54,000
Decrease in Provision for bad debts
Example
The debtors’ accounts on 31 December 2006 totaled $40,000. The firm decided to maintain the provision at 10% of the total debtors.
Provision for Bad Debts2004 $ 2004 $
Dec 31 Balance c/d 5,000
($50,000 * 10%)
Dec 31 Profit and loss 5,000
2005Dec 31 Balance c/f
($60,000*10%) 6,000
2005Jan 1 Balance b/d 5,000
Dec 31 Profit and Loss 1,000
6,000 6,000
2006 $ 2006 $
6,000
Jan 1 Bal b/f 6,000Dec 31 Profit and Loss 2,000
6,000
31 Balance c/f
($40,000*10%) 4,000
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit
Less: ExpensesIncrease in provision for bad debt 5,000
$X
$2004 2005
$ $X
1,000
2006$ $
X Add: Decrease in provision for bad debts 2,000
Balance Sheet as at 31 December (Extract)Current Assets
2004
DebtorsLess: provision for bad debt
50,0005,000
45,000
2005
60,0006,000
54,000
2006
40,000 4,000
36,000