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Bad debts and Provision for Bad debts
Bad DebtsWhen 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 DebtsCr Debtor
With the irrecoverable amount of a debt
ExampleDuring 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 $1,000 respectivelyLater, Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts.The company decided to write these off as bad debts.
Mr. Lee$ $
Bank 800
Mr. Wong$ $
Sales 1,500
Bank 1,000
Sales 2,000
2,000 2,000
Balance c/f 1,200
Bad Debts 500
Mr. Wu
$ $Sales 300 Bad Debts 300
Bad Debts
$$
Mr. Wong 500
Mr. Wu 300
P/L 800
800 800
1,500 1,500
B. 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 totalled $50,000 on 31 December 1994.On 31 December 1995, the debtors accounts totalled $60,000. The firm maintained the provision at 10% of its total debtors.
Provision for Bad Debts1994 $ 1994 $
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)
1994
Current Assets1994
DebtorsLess: provision for bad debt
50,000
5,00045,000
Provision for Bad Debts1994 $ 1994 $
Dec 31 Balance c/d 5,000
($50,000 * 10%)
Dec 31 Profit and loss 5,000
1995Dec 31 Balance c/f
($60,000*10%) 6,000
1995Jan 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
$
1994 1995
$ $X
1,000
Balance Sheet as at 31 December (Extract)
Current Assets1994
DebtorsLess: provision for bad debt
50,000
5,00045,000
1995
60,000 6,000
54,000
Decrease in Provision for bad debts
Example
The debtors’ accounts on 31 December 1996 totalled $40,000. The firm decided to maintain the provision at 10% of the total debtors.
Provision for Bad Debts1994 $ 1994 $
Dec 31 Balance c/d 5,000
($50,000 * 10%)
Dec 31 Profit and loss 5,000
1995Dec 31 Balance c/f
($60,000*10%) 6,000
1995Jan 1 Balance b/d 5,000
Dec 31 Profit and Loss 1,000
6,000 6,000
1996 $ 1996 $
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
$
1994 1995
$ $X
1,000
1996$ $
X Add: Decrease in provision for bad debts 2,000
Balance Sheet as at 31 December (Extract)
Current Assets1994
DebtorsLess: provision for bad debt
50,000
5,00045,000
1995
60,0006,000
54,000
1996
40,000 4,000
36,000
C. Bad Debts RecoveredBad 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 1996:
$
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
Bank1996 $
Dec 31 Debtors 1,500 Debtors
1996 $
Dec 31 Bal b/d 10,000
1996 $
Dec 31 Bank 1,500Dec 31 B.D.R. 300
Dec 31 B.D.R. 1,200 Bad Debt
1996 $
Dec 31 Bal b/d 1,0001996 $Dec 31 B.D.R. 300Dec 31 P & L 700
Bad Debt Recovered1996 $
Dec 31 P & L 1,200
1996 $
Dec 31 Debtors 300Dec 31 Bad Debt 300
Dec 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
1996$ $
X Add: Bad Debt Recovered 1,200
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