Provision for Bad Debts A provision for doubtful debts can either be for a

Provision for bad debts a provision for doubtful

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Provision for Bad-Debts A provision for doubtful debts can either be for a speCific or a general provision. A specific provision is where a debtor is known and chances of recovering the debt are low. The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad debts and specific provision, Accounting For Bad and Doubtful Debts Bad debts When a debt becomes bad the following entries will be made: i. Debit bad debts account Credit debtors account with the amount owing. ii. Debit Profit and Loss Account. Credit bad debts account to transfer the balance on the bad debts account to the income statement account
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FINANCIAL ACCOUNTING Contact: 0707 737 890 Page 118 Accounting treatment for provision of doubtful debts The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be as follows. If it is the 1 st year of trading (1 st year of making provision) i. Debit P&L a/c. ii. Credit provision for doubtful debts (with total amount of the provision). In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision. If it is an increase: iii. Debit P&L a/c. iv. Credit provision for doubtful debts (with increase only). If it is a decrease: i. Debit provision for doubtful debts. ii. Credit P&L a/c (with the decrease in provision only). Illustration Minim Ltd. started trading on 1 January 2013. It has been adjusting its doubtful debt provision at the end of each year on percentage basis, but each year the percentage rate is adjusted in accordance with the economic performance in the country. The following details are available for the years ended 31 December 2013, 2014 and 2015. Year Bad debts Witten off at year end Debtors at year end Provision for bad and doubtful debts 2013 2014 2015 656,000 1,805,000 3,817,000 22,000,000 40,000,000 60,000,000 5% 7% 6% Required; i. Had debts account for the three years ii. Provision for bad and doubtful debts for the years 2013, 2014 and 2015 iii. The balance sheet extracts for the years 2013, 2014 and 2015.
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FINANCIAL ACCOUNTING Contact: 0707 737 890 Page 119 Solution i. Bad debts account for the three years Bad debts account Sh. 31.12.2013 Debtors 656,000 31.12.2014 Debtors 1,805,000 31.12.2015 Debtor 3,847,000 Sh. 31.12.2013 Profit and loss 656,000 31.12.2014 Profit and loss 1,805,000 31.12.2015 Profit and loss 3,847,000 ii. Provision for bad and doubtful debts for the years 2013, 2014 and 2015 Year Debtors at year end Provision for bad and doubtful debts 2013 2014 2015 22,000,000 40,000,000 60,000,000 5%x22,000,000 =1,100,000 7%x40,000,000=2,800,000 6%x60,000,000=3,600,000 Bad debts account Sh. 31.12.2013 balance c/d 1,100,000 31.12.2014 balance c/d 2,800,000 - 2,800,000 31.12.2015 balance c/d 3,847,000 - 3,600,000 Sh. 31.12.2013 Profit and loss 1,100,000 1.1.2014 balance b/d 1,100,000 31.12.2014 P&L (Bal. figu) 1,700,000 2,800,000 1.12015 Balance b/d 2,800,000 31.12.2015 P&L (Bal. figu) 800,000 3,600,000 iii. The balance sheet extracts for the years 2013, 2014 and 2015. Sh. Sh. 31.12.2013 Debtors Less Provisions for doubtful debts 31.12.2014 Debtors Less Provisions for doubtful debts 31.12.2014 Debtors Less Provisions for doubtful debts 22,000,000 (1,100,000) 40,000,000 (2,800,000) 60,000,000 (3,600,000) 20,900,000 37,200,000 56,400,000
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FINANCIAL ACCOUNTING Contact: 0707 737 890 Page 120 CONTROL ACCOUNTS Control accounts are so called because they control a section of the ledgers. By control me mean that the total on the control accounts should be the same as the totals on the ledger accounts. Control •
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