Bad debts and Provision for bad debts.pdf

Most sales are made on credit, we looked at credit transactions in previous chapters. When sales are made on credit there is a risk of default, some debtors do not pay back. When a debt goes bad (not recovered) that bad debt is treated as a normal business expense, it therefore reduces profit.
The debtor may fail to pay the whole amount or part of the debt.
Double entry is:
Debit Profit and Loss account
Credit Debtors account

1. xd

2. CHAPTER 13

BAD DEBTS AND PROVISION FOR BAD DEBTS
Most sales are made on credit, we looked at credit transactions in previous
chapters. When sales are made on credit there is a risk of defaut, some debtors
do not pay back. When a debt goes bad (not recovered) that bad debt is
treated as a normal business expense, it therefore reduces profit.
The debtor may fail to pay the whole amount or part of the debt.
Double entry is:
Debit Profit and Loss account
Credit Debtors account

EXAMPLE
20X6
April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000
Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable, and
were written off as bad.
Prepare relevant accounts

3. 20X6
April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000
Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable, and
were written off as bad



April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000
Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable, and
were written off as bad

4. April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000
Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable, and
were written off as bad.



April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000
Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable,
and were written off as bad





April 4 Credit sales to A. White $6,000
April 7 Credit sales to J. Shaw $8,000
April 9 Credit sales to W. Jackson $5,000

5. Apirl 12 Received a cheque of $4,000 from J. Shaw
Apirl 14 Received a cheque of $5,000 from A. White
April 30 It was discovered that the remaining balances were irrecoverable,
and were written off as bad.


Double entry:
Debit: Bad debts Account
Credit: Debtors Account
The first step is to balance off these debtors accounts, the balances are what
we are going to write off, sending them to the bad debts account.








Note: At the end of the month, the bad debts account is balanced and the
closing balance sent to the profit and loss account.

7. PROVISION FOR DOUBTFUL DEBTS
Provisions are just estimates, a business makes these estimate on debtors to
avoid overstating assets since these debtors are current assets.
Prudence consept also states that a business must not oversate profits.
Provision for doubtful debts are expenses and are charged to profit and loss
account thereby reducing profits.

Example

On 31 December 20X7 schedule of remaining debtors: $15,400
And a Provision for doubtful debts of $400 is made




INCREASING PROVISION FOR DOUBTFUL DEBTS
From the previous example, provision was $450, which is 3% of debtors, now
let’s asume that in 20X7 the business wants to increase provision for doubtful
debts because debtors have increased to $17,000 but provision is kept at 3%.
3% of $17,000 is $510
Expenses will increase by $60 ($510 - 450) and in the balance sheet, instead of
charging $450 we will start charging $510

8. `

REDUCING PROVISION FOR DOUBTFUL DEBTS
Here you do the opposite of what we did in the previous example.
From the previous example, provision for doubtful debts was $510, which is
3% of debtors, currently at $17,000. Now lets asume that in 20X8 debtors
have fallen to $16,000 but provision for doubtful debts is kept at 3%.
3% of $16,000 is $480.
Expenses will decrease by $30 ($510-$480) and profit will increase by the
same amount. In the balance sheet, instead of charging $510 we will start
charging $480.

9. BAD DEBTS RECOVERED
A debtor whose account was written off, can decide to pay back the amount
owing. When that happens, The procedure is as follows:
a) The procedure is to re instate the debt or show the account the way it
was before the debt was written off.
Debit: Debtor’s Account
Credit: Bad Debts Recovered Account
b) When payment is received from the debtor, in payment of the debt
owing (part or all)
Debit: Cash book (Cash or Bank)
Credit: Debtor’s Account

Example
Assuming that from the previous examples, J. Shaw owed us $4,000 and W.
Jackson owed us $5,000 in 20X6 and their accounts were written off on 30 April
20X6. In 20X7 the following transactions took place:
20X7
May 4 Received $4,000 from J. Shaw in total settlement of his acccount
May 7 Received $3,000 from W. Jackson in repayment of his debt

10. Steps:
i. Accounts of J. Shaw and W. Jackson are to be re opened showing their
debts








ii. We are going to debit cash book (Cash account or Bank Account) with
the amounts received and credit debtors Accounts

11. ABOUT THE AUTHOR


Davie Kaliu was born and raised in Malawi, a country
in the southern part of Africa.
He is married to Lucina and together they have three
children, two boys; Tony and Davie Jr, and a girl
Evalister. He also looks after three high school
children.
He studied accounting and spent early years of his
carrier as a high school accounting teacher.
When he is not writing books, he is writing poetry or
growing vegetables
He has plans to write computer and fiction books.
More books coming your way, get ready.
[phone]
[email protected]
[email protected]


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 Bad debts and Provision for bad debts.
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