Bad debts

i. Provisions for doubtful debts If at the year-end, you have any doubts over the recoverability of a debt, a provision should be made for this amount.A provision is an early recognition of a likely future expense - here offset against debtors (rather than completely removed).The entry is as follows:

As you can see, an expense is immediately recognised in the Profit & Loss account. The provision is an ongoing item in the Balance Sheet. An example "T" account & explanation is given below.

The opening provision (b/f) is a doubtful debt of 200 from a customer called Jones. During the year, we actually recovered this debt (Cr Bad Debt Expense - reversing the expense which would have hit the Profit & loss account last year). We also Dr Cash (the 200 received) & Cr Debtors Control "T" account as usual. Two other debts became doubtful during the year - from customers Adams & Smith. The 450 will have been Debited to the Bad Debt Expense "T" account. The final Bad Debt expense that will be deducted in the Profit & Loss account is 250 (i.e. that 450 less the 200 cash received from Jones - the movement in the provision). The c/f balance of 450 will be offset against total debtors in the Balance Sheet. Note that provisions can be specific (as above) or general. That is, a provision of, say, 1% of total debtors if that is a typical amount (usually applicable where there are many small customers).

for bad debts journal entry baddebts account dr to debtors account for provision for baddebts bad debts account dr to provision for bad debts for writting of provistion baddebts a/c dr to baddebts account