Bad debts and Provision for Doubtful Debts BAD DEBTS AND BAD DEBTS RECOVERED Bad Debts A bad debt is an amount owing to a business which will not be paid by the debtor Reason Debtor has disapearred ID: 270542
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Slide1
Chapter 13
Bad debts and Provision for
Doubtful DebtsSlide2
BAD DEBTS AND BAD DEBTS RECOVEREDSlide3
Bad Debts
A bad debt is an amount owing to a business which will not be paid by the debtor.
Reason:
Debtor has
disapearred
Debtor gone out-of-business
Debtor unable to pay
If all reasonable steps to obtain payment have failed, th
e debt is
written off
as a bad debt.Slide4
Accounting Entries:
Dr
Bad Debts
Cr Debtor
With the irrecoverable
(unable to be paid) amount of a debtSlide5
Example 1
On 1 April 2011,
ABC
company sold goods for $2,000 to Mr. Lee, $1,500 to Mr
. Wong
and $
3,000 to Mr. Wu.
On 1 June 2011, Mr
. Lee and Mr. Wong paid the company $800 and $1,000
respectively with
cheque
.
Later, on 31
Dec
2011
Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the
company
to collect these debts
. The company decided to write these off as bad debts.Slide6
Journal entries
Date
Details
Fo
Dr
Cr
2011
Apr 1Mr. Lee
Mr. Wong
Mr. Wu
Sales
2000
150030006500
On 1 April 2011, aBC. company sold goods for $2,000 to Mr. Lee, $1,500 to Mr. Wong and $3,000 to Mr. Wu.Slide7
Ledger
Date
Details
Fo
$
Date
Details
Fo
$
2011
Apr
1
Mr. Lee
Mr. Wong
Mr. Wu
2,0001,5003,000
ABC Co.Sales Acc.
DateDetailsFo$DateDetailsFo$2011Apr 1Sales2,000
Mr. Lee
DateDetailsFo$DateDetailsFo$2011Apr 1Sales1,500
Mr. Wong
DateDetailsFo$DateDetailsFo$2011Apr 1Sales3,000
Mr. WuSlide8
Journal entries
Date
Details
Fo
Dr
Cr
2011
Jun 1Bank Mr. Lee
Mr. Wong
1 800
800
1 000
On 1 June 2011, Mr. Lee and Mr. Wong paid the company $800 and $1,000 respectively with
cheque
.Slide9
ledger
Date
Details
Fo
$
Date
Details
Fo
$
2011
June
1Mr. Lee
Mr. Wong
800
1,000
ABC Co.Cash Book (Bank column only)
Sales LedgerMr. LeeMr. Wong
DateDetailsFo$DateDetails
Fo$2011Apr 1Sales2,0002011June 1Bank800DateDetailsFo$
DateDetailsFo$2011Apr 1Sales
1,5002011June 1Bank1,000DateDetailsFo$DateDetailsFo$2011Apr 1
Sales
3,000
Mr. WuSlide10
Journal entries
Date
Details
Fo
Dr
Cr
2011
June 1Bad Debts
Mr.Wong
Mr. Wu
3500
5003000
Later, on 31 Dec 2011 Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts. The company decided to write these off as bad debts.Slide11
LEDGER
Date
Details
Fo
$
Date
Details
Fo
$
2011
Dec
31
Mr. WongMr. Wu
500
3,000
3,5002011Dec 31Profit & Loss
3,500 3,500ABC Co.Nominal Ledger
Bad Debts AccountDateDetailsFo$DateDetailsFo$2011Apr
1Sales1,5002011June 1Dec 31BankBad Debts
1,0005001,500DateDetailsFo$DateDetailsFo$2011Apr 1Sales
3,0003,0002011Dec 31Bad Debts3,0003,000
Mr. WuSales LedgerMr. WongSlide12
B. Bad Debts Recovered
A bad debt recovered arises when a debtor pays some, or all, of the amount owed, after the amount was written off as a bad debt.Slide13
Journal Entries
Description
Dr
Debtors
Cr Bad Debts Recovered
With the debt reinstated in the debtor’s account
Dr
Cash/Bank
Cr Debtors
With the amount received
Accounting entriesSlide14
Example 2
The following balances were part of the trial balance of Mr. Chan on 31 December
2012:
$
Debtors 10,000
Bad Debts
1,000
On 31 December 2012,
Mr. Chan
received
cheques
of $ 1,000 from debtors, whose debts had been previously written off as bad debts in the current year respectively
. No entry has been made for these transactionsSlide15
Journal entries
Date
Details
Fo
Dr
Cr
2012
Dec 31Debtors
Bad Debts Recovered
1000
1000
31
Bank
Debtors
1000
1000
On 31 December 2012, Mr. Chan received cheques of $ 1,000 from debtors, whose debts had been previously written off as bad debts in the current year respectively. No entry has been made for these transactionsSlide16
LEDGER
Date
Details
Fo
$
Date
Details
Fo
$
2012
Dec
31
Debtors
1,000
ABC Co.
Cash Book (Bank column only)
Nominal Ledger
Debtors AccountDateDetailsFo$DateDetailsFo
$2012Dec 31312013Jan 1 Total to dateBad Debts Rec.Balance
b/d10,0001,00011,00010,0002012Dec 3131BankBalancec/d1,00010,00011,000Slide17
Ledger
Bad Debts
Date
Details
Fo
$
Date
Details
Fo
$
2012
Dec 31
Total
to date
1,000
1,000
2012Dec 31Profit & Loss1,0001,000
DateDetailsFo$DateDetailsFo$2012Dec 31Profit & Loss1,0001,0002012Dec 31Debtors1,0001,000
Bad Debt RecoveredSlide18
Bad Debts & Bad debts Recovered
in profit & loss account
Continued from Example 2
Mr. Chan
Profit & Loss for the year ended 31 Dec 2012
$ $
Gross Profit xx
Add: Revenues: Bad Debts Recovered 1000
1000
xx Less: Expenses: Bad Debts
1000
(1000)Net Profit xxSlide19
Reducing the possibility of bad debts
Not to sell goods on credit
Applying credit control
Taking legal action against the debtorSlide20
PROVISION FOR DOUBTFUL DEBTSSlide21
A provision for doubtful debts is an estimate of the amount which a business will lose in a financial year because of bad debts.
Considerations in deciding the amount of provision:
Looking at each individual debtor’s account
Estimating on the basis of past experience
Considering the length of time debts have been outstanding
Provision for Doubtful DebtsSlide22
Creating a Provision
Dr
Doubtful Debts
Cr Provision for doubtful debts
With the amount of provision for doubtful debts created.
Increase in provision
Dr
Doubtful Debts
Cr Provision for Doubtful debts
With the increase in the amount of provision for doubtful debts.
Decrease in provision
Dr
Provision for Doubtful Debts
Cr Doubtful Debts
With the decrease in the amount of provision for doubtful debts.
Accounting entriesSlide23
Example 3:
Sachin’s
financial year ends on 31 December.
During the year ended 31 December 2004 he wrote off bad debts
totalling
$ 950.
On 31 December his debtors owed $ 25,000. He decided to create a provision for doubtful debts of 4 % of the debtors.
A. Creating ProvisionSlide24
Date
Details
Fo
Dr
Cr
2004
Dec 31
Doubtful Debts Provision for doubtful debts
'1,000*
1,000*
Journal entries
On
31 December
2004, his
debtors owed $ 25,000. He decided to create a provision for doubtful debts of 4 % of the debtors.
*) 1,000 = 4% x $ 25,000Slide25
Date
Details
Fo
$
Date
Details
Fo
$
2004
Dec
31
Total
to date9509502004
Dec 31
Profit & Loss
950950
LEDGERSachinNominal Ledger
Bad Debts AccountDateDetailsFo$DateDetailsFo$
2004Dec 31Prov. for Doubtful Debts1,000
1,0002004Dec 31Profit & Loss1,000 1,000Doubtful Debts AccountSlide26
Date
Details
Fo
$
Date
Details
Fo
$
2004
Dec
31
Balance
c/d1,000
1,000
2004Dec 312005Jan 1Doubtful DebtsBalance
b/d1,0001,0001,000LEDGER
Provision for Doubtful Debts AccountSlide27
Sachin
Profit & Loss Account for the year ended
31 Dec 2004
Gross Profit xx
Add: Revenues
xx
xxLess: Expenses: Bad Debts 950 Doubtful Debts 1,000 (1,950)Net Profit
xx
Final AccountsSlide28
Sachin
Balance Sheet at 31 December 2004
Final Accounts
Fixed
Assets xx
Current Assets
Debtors
25,000
Less: Provision for
Doubtful Debts
(1,000)
24,000
Capital xx
Long
Term Liab. xxCurrent
Liab. xxSlide29
Continued from example 3:
On 31December 2004,
Sachin
created a provision for doubtful debts of $ 1,000.
During the year ended 31 December 2005,
Sachin
wrote off bad debts
totalling $ 990.On 31 December 2005, his debtors owed $ 28,000. He decided to maintain the provision for doubtful debts at the rate of 4 % of the debtors.B. Increasing a ProvisionSlide30
Date
Details
Fo
Dr
Cr
2005
Dec 31
Doubtful Debts Provision for doubtful debts
120*
120*
Journal entries
On 31 December 2005, his debtors owed $ 28,000. He decided to maintain the provision for doubtful debts at the rate of 4 % of the debtors.
*) (4 % x $ 28,000) - $ 1,000Slide31
Date
Details
Fo
$
Date
Details
Fo
$
2005
Dec
31
Total
to date9909902005
Dec 31
Profit & Loss
990990
LEDGERSachin
Nominal LedgerBad Debts AccountDateDetailsFo$DateDetailsFo
$2005Dec 31Prov. for Doubtful Debts
1201202005Dec 31Profit & Loss120 120Doubtful Debts AccountSlide32
Date
Details
Fo
$
Date
Details
Fo
$
2004
Dec
31
2005
Dec 31Balance Balance
c/d
c/d
1,000 1,000
1,120 1,1202004Dec 312005Jan 1Dec 312006Jan 1Doubtful DebtsBalanceDoubtful DebtsBalance
b/db/d1,0001,0001,0001201,1201,120LEDGERProvision for Doubtful Debts AccountSlide33
Sachin
Profit & Loss Account for the year ended
31 Dec 2005
Gross Profit xx
Add: Revenues
xx
xxLess: Expenses: Bad Debts 990 Doubtful Debts 120 (1,110)Net Profit
xx
Final AccountsSlide34
Sachin
Balance Sheet at 31 December 2005
Final Accounts
Fixed
Assets xx
Current Assets
Debtors
28,000
Less: Provision for
Doubtful Debts
(1,120)
26,880
Capital xx
Long
Term Liab. xxCurrent
Liab. xxSlide35
Continued from example 3:
On 31 December 2005,
Sachin’s
provision for doubtful debts amounted to $ 1,120.
On 31 December 2006, his debtors owed $ 24,000. He decided to maintain the provision for doubtful debts at the rate of 4% of the debtors.
C
. Reducing a ProvisionSlide36
Date
Details
Fo
Dr
Cr
2006
Dec 31
Provision for doubtful debts Doubtful Debts
160*
160*
Journal entries
On 31 December 2006, his debtors owed $ 24,000. He decided to maintain the provision for doubtful debts at the rate of 4% of the debtors.
*) 1,120 – (4 % x $ 24,000)Slide37
LEDGER
Sachin
Nominal Ledger
Doubtful Debts Account
Date
Details
Fo
$
Date
Details
Fo
$
2004
Dec 31
Profit & Loss
160
1602004Dec 31Prov. for Doubtful Debts160160Slide38
Date
Details
Fo
$
Date
Details
Fo
$
2004
Dec
31
2005
Dec 312006Dec 3131
Balance
BalanceDoubtful DebtsBalance
c/dc/dc/d1,000 1,0001,120 1,120
1609601,1202004Dec 312005Jan 1Dec 312006Jan 12007Jan 1Doubtful DebtsBalanceDoubtful DebtsBalanceBalance
b/db/db/d1,0001,0001,000
1201,1201,120 1,120960LEDGERProvision for Doubtful Debts AccountSlide39
Sachin
Profit & Loss Account for the year ended
31 Dec 2006
Gross Profit xx
Add: Revenues:
Reduction in Provision for
Doubtful Debts 160 160 xxLess: Expenses: (xx)Net Profit
xx
Final AccountsSlide40
Sachin
Balance Sheet at 31 December 2006
Final Accounts
Fixed
Assets xx
Current Assets
Debtors
24,000
Less: Provision for
Doubtful Debts
(960)
23,040
Capital xx
Long
Term Liab. xxCurrent Liab
. xx