Provision for bad debts a provision for doubtful

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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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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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

FINANCIAL ACCOUNTING
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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 •