Bad debts allowances for doubtful debts and provisions for discounts on accounts receivable Learning objectives After you have studied this chapter you should be able to Explain and show how bad debts are ID: 256751
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Slide1
Chapter 25
Bad debts, allowances for doubtful
debts,
and provisions for discounts
on accounts receivableSlide2
Learning objectives
After you have studied this chapter, you should be able to:
Explain and show how bad debts are
written-off
Explain why allowances for doubtful debts are
made
Make the necessary entries to record an allowance for doubtful debts in the
booksSlide3
Learning objectives
(Continued
)
Calculate and make provisions for discounts on accounts
receivable
Make all the entries in the income statement and statement of financial position for bad debts, allowances for doubtful
debts
and provisions for cash
discountSlide4
Bad debts
Many businesses sell on credit and there is therefore a risk that some customers will not pay for their goods
and become a bad
debt.
When a debt is considered bad, the asset shown in the debtor’s account is worthless and so
eliminated.
Bad debts are considered a business expense and are charged to the income statement as an
expense.Slide5
Recording a bad debt
Credit the debtor’s account to remove the
debt.
Debit the bad debt account to increase the
expense.Slide6
Recording a bad debt
(Continued
)Slide7
Allowance for doubtful debts
It is likely that some debts held by the business will prove to be bad
debts.
The prudence concept says that this possibility needs to be provided for in the current
period.
Therefore an allowance needs to be made in the current period for debts that might be bad by
:
debiting
the
p+l
account with the allowance
Crediting the allowance for doubtful debts
account.Slide8
Creating an allowance for doubtful debtsSlide9
Increasing the allowance
To increase the allowance
:
Debit the profit and loss account with the increase in the
allowance.
Credit the allowance for doubtful debts
account.Slide10
Increasing the allowance
(Continued
)Slide11
Reducing the allowance
To reduce the allowance
:
Debit the allowance for doubtful debts
account.
Credit the profit and loss
account.Slide12
Reducing the allowance
(Continued
)Slide13
Provisions for cash discounts
on accounts receivable
Some businesses create provisions for cash discounts to be allowed on the accounts receivable outstanding at year
end.
It is argued that the cost of discounts should be charged in the period when the sales were
made.
The procedure used is similar to that used for the allowance for doubtful
debts.Slide14
How to record provisions
for cash discountsSlide15
Learning outcomes
You should have now
learnt:
That debts we are unable to collect are called bad
debts
That bad debts are credited to the customer’s account (to cancel them) and debited to a bad debts
accountSlide16
Learning outcomes
(Continued
)
That allowances for doubtful debts are needed, otherwise the value of the accounts receivable in the statement of financial position will show too high a value, and could mislead anyone looking at the statement of financial position.
Also
, making a provision of this type allows for more accurate calculation of profits and
lossesSlide17
Learning outcomes
(Continued
)
That the allowance for doubtful debts is calculated after bad debts have been deducted from the debtor
balances
That the amount of the allowance for doubtful debts is based on the best estimate that can be made taking all the facts into
account
That an increase in the allowance for doubtful debts will create a debit entry in the profit and loss
accountSlide18
Learning outcomes
(Continued
)
That a reduction in the allowance for doubtful debts will create a credit entry in the profit and loss
account
That the allowance for doubtful debts is shown as a deduction from accounts receivable in the statement of financial
position
That provisions for cash discounts are made in the same way as provisions for doubtful
debtsSlide19
Learning outcomes
(Continued
)
10
. How
to record bad debts, allowances for doubtful
debts
and provisions for cash discounts in the accounting books and in the income statement and statement of
financial
position