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Bad debts and Provision for Bad debts
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Bad debts and Provision for Bad debts

Feb 20, 2016

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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 Debtor. With the irrecoverable amount of a debt. Example. - PowerPoint PPT Presentation
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Page 1: Bad debts and Provision for Bad debts

Bad debts and Provision for Bad debts

Page 2: 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

Page 3: Bad debts and Provision for Bad debts

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.

Page 4: Bad debts and Provision for 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

Page 5: Bad debts and Provision for Bad debts

B. Bad Debts Recovered

• Bad debts recovered refers to debts formerly written off to be recovered later.

Page 6: Bad debts and Provision for Bad debts

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

Page 7: Bad debts and Provision for Bad debts

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

Page 8: Bad debts and Provision for Bad debts

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

Page 9: Bad debts and Provision for Bad debts

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

Page 10: Bad debts and Provision for Bad debts

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.

Page 11: Bad debts and Provision for Bad debts

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

Page 12: Bad debts and 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.

Page 13: Bad debts and Provision for Bad debts

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

Page 14: Bad debts and Provision for Bad debts

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

Page 15: Bad debts and Provision for Bad debts

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

Page 16: Bad debts and Provision for Bad debts

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.

Page 17: Bad debts and Provision for Bad debts

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

Page 18: Bad debts and Provision for Bad debts

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