IGCSE Accounting Course Instructor : Manarat Ahmed BAD & DOUBTFUL DEBTS Bad debts :It is the amount of money that the debtors cannot pay due to insolvency or any other reason.It is an expense for the business.Provision for doubtful debts :It is a provision which is made for debts which may or may not be collected from the debtors.It acts as a future forecast for the business.Bad debts recovered :It is the debt which was previously written off but now recovered.

Journal entries :i) To record bad debts : Bad debts -Dr.Debtors-Cr.ii) To record bad debts to profit and loss a/c :Profit and loss Dr.Bad debts Cr.Dr. Bad debts A/C Cr.DateDetailsDateDetails

givenDebtors (i)***lastProfit and Loss (ii)***

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Q. With which accounting concept does the creation of a provision for doubtful debts comply?Ans. Prudence (conservatism)Prudence concept anticipates possible losses that the business might suffer rather than calculating overstated profits.It is important because it leads to the preparation of true and fair values of accounts which will be required by decision makers for evaluating financial statements.

Methods to encourage debtors to make payments quickly:1.Cash discounts.***However, allowing cash discounts will cause a fall in revenue and, hence, liquidity of the business falls.2.Charge interest on dues.However, this might discourage the debtors even more to make payments within time.3.Stop providing goods on credit.However, this might discourage some customers to carry on business anymore as they are dependent on credits.4.Take legal action.However, taking legal support might increase the expense for the business.

FORMATS :

Dr. Provision for doubtful debts A/C Cr.DateDetailsDateDetails

Last dateProfit and loss A/C (balancing figure +decreased amount) ***1st dateBalance b/d***

Last dateBalance c/d***Last dateProfit and loss A/C (balancing figure+ increased amount)***

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1st dateBalance b/d***

iii)To record bad debts recovered:Debtors A/C- Dr.Bad debts recovered A/C- Cr.iv)To transfer bad debts recovered to profit and loss A/C:Bad debts recovered A/C- Dr.Profit and loss A/C- Cr. Dr. Bad debts recovered A/C Cr.DateDetailsDateDetails

LastProfit and loss A/C ***givenDebtors ***

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Other formats: Profit and loss A/CDetails

Gross profit***

Add decrease in provision for doubtful debts***

Add bad debts recovered ***

***

Less expenses:

Bad debts ***

Increase in provision for doubtful debts ***

(***)

Net profit***

Balance sheet (extracted) Details

Current assets:

Debtors***

Less provision for doubtful debts (Balance c/d)(***)

***

Points to remember : Provision for doubtful debts are simply ESTIMATES. Bad debts = expense for the business Increase in provision = expense for the business Decrease in provision = income for the business Bad debts recovered = income for the business Profit and loss is the balancing figure for the provision for doubtful debts account Balance c/d is the amount to be deducted from debtors in the balance sheet Other formulas:Calculation of % of provision for bad debts

Bad debts ExercisesProblem 1 : Bad debts during the yearDebtors during the year% of provision

2002423600010

2003510700010

2004604775010

2005610650010

****there has been a bad debts recovered of 1200 from Steyn at 31Dec. 2004From the above info prepare : bad debts account for four years provision for bad debts account for four years bad debts recovered account profit and loss account for 2004 balance sheet (extracted)for 2004 , 2005

Problem 2 :Bad debts during the yearDebtors during the year% of provision

200642065005

200796975005

200812330005

200945635005

****there has been a bad debts recovered of 200 from Anthony at 31Dec. 2008From the above info prepare : bad debts account for four years provision for bad debts account for four years bad debts recovered account profit and loss account for 2008 balance sheet for 2008 , 2009Team Work :

ItemItem NameAccountDebit / CreditMeaning

1DebtorsDebit

2Profit & lossDebit

3Balance c/dDebit

4Bad debts recoveredCredit

5Balance b/dCredit

6Profit & lossCredit

7Bad debts recoveredDebit

Bad and Doubtful Debts | 4