Chapter 5

Bad Debts, Bad Debts Provision and Bad Debts Recovered

(a) Bad Debts: Debtors who are bankrupt and their amounts due are written
off. These are losses to the business therefore they are debited.
Debit:
Credit:

Double Entry:

Bad Debts
Debtors

At year-end Bad Debts are transferred to the Profit and Loss Account as
Expenses.
Debit:
Credit:

Double Entry:

Profit and Loss

Bad Debts

Example: G.Borg, one of our debtors owed the business Lm400. He failed to
pay and we decided to write off this amount due from the business accounts.
Sales Ledger
Dr
2006
Jan-01

Balance b/d

G. Borg Account
2006
400
Jan-31

Cr
Bad Debts

400

General Ledger
Dr
2006
Jan-31 G.Borg

Bad Debts Accounts

2006
400
Dec-31 To Profit and Loss

Cr
400

Profit and Loss Account (Extract) for the year ending 31 December 2000
Expenses
Bad Debts
500

(b) Bad Debts Provision or Doubtful Debts Provision: This is an estimated

loss on debtors. It is calculated as a percentage on debtors who might become
bankrupt in the future. The percentage is based:

On past experience (this is known as General Provision).

When debtors accounts are examined individually and any debt likely to
become bad is listed. (This is known as Specific Provision).

Pg.34

Lm refer to currency in Sri Lanka

Example:
2004
Debtors
Bad Debts Provision

2005

Lm12,000
5%

Lm20,000
5%

2006
Lm16,000
5%

Percentage on Bad Debts Provision:

it depend on company policy,
2004: 5% x 12,000 = Lm600 (Creation of Bad Debts Provision) whether want to increase/decrease/
maintain the percentage for the next
2005: 5% x 20,000 = Lm1,000 (Increase of Lm400)
year.
2006: 5% x 16,000 = Lm800 (Decrease of Lm200)

Workings:

Dr
2004
Dec-31 Balance c/d
2005
Dec-31 Balance c/d

Bad Debts Provision Account

Lm
2004
600 Dec-31 To Profit and Loss
1,000

2005
Jan-01 Balance b/d
Dec-31 To Profit and Loss

1,000
2006
Dec-31 To Profit and Loss
Dec-31 Balance c/d

200
800
1,000

2006
Jan-01 Balance b/d

Double Entry Used:

Creation

Debit: Profit and Loss

Credit: Bad Debts Provision
(With amount created)

Increase

Debit: Profit and Loss

Credit: Bad Debts Provision
(With amount of increase)
Debit: Bad Debts Provision
Credit: Profit and Loss
(With amount of decrease)

Pg.35

600
600
400
1,000
1,000
1,000

2007
Jan-01 Balance b/d

Decrease

Cr

800

Profit and Loss Account (Extracts) for the years ending 31 December
2004/05/06
2004
Gross Profit
Less Expenses
Creation of Bad Debts Provision
600

Lm
xxxxxx

2005
Lm
xxxxxx

Gross Profit
Less

Expenses
Increase of Bad Debts Provision

400

2006
Lm
xxxxxx

Gross Profit
Revenues
Decrease In Bad Debts Provision

200

Balance Sheet (Extracts) as at 31 December

1999,2000,2001
Currents Assets
Less

Debtors
Bad Debts Provision
Currents Assets

Less

Debtors
Bad Debts Provision
Currents Assets

Less

(c)

Debtors
Bad Debts Provision

Lm

Lm

12,000
(600)

11,400

Lm

Lm

20,000
(1,000)

19,000

Lm

Lm

16,000
(800)

15,200

Bad Debts Recovered: When a debt written off as Bad in previous

years is recovered / received in later years.

Pg.36

Example:
G.Borg was bankrupt on 31 January 2000. He owed the business,
Lm200 and this amount was written off as a Bad Debt. On 30 July 2006 this
amount was recovered.
Dr
2006
Jul-30 (1) Bad Debts Recovered

G.Borg Account
Lm
2003
Jul-30 (2) Cash
200

Dr
2003
Dec-31 (3) To Profit and Loss

Bad Debts Recovered Account

Lm
2003
200
Jul-31 (1) G.Borg

Dr
Jul-31 (2)

Cash Account
200

G.Borg

Cr
Lm
200

Cr
Lm
200
Cr

Profit and Loss Account (Extract) for the year ending 31 December
2003
Lm
xxxxx

Gross profit
Revenues:
Add

Bad Debts Recovered

200

Double Entry Used:

(1)

Debit: Debtor Account

Credit: Bad Debts Recovered Account

(with amount of Debt)

(2)

Debit: Cash/ Bank Account

Credit: Debtor Account (with amount received from debtor)

(3)

Debit: Bad Debts Recovered Account

Credit: Profit and Loss Account (with amount recovered to be shown
as gain in the profit and loss account)

Pg.37

Exercises
1.

L.Cauchi commenced business on 1 May 2000 as a wholesaler, selling

furniture to retail outlets. The final accounts of his business are
prepared on 30 April each year. The Bad Debts Provision amounts to
5% of debtors.
The following information relates to the 3 years ending 30 April - 2003.
Year Ending :

30 Apr 2001

30 Apr 2002

30 April 2003

Lm
18,000
800

Lm
23,000
1,000

Lm
20,000
900

Total Debtors at year end :

Bad Debts written off :

The Provision for Bad Debts was maintained each year at 5% of the
Total debtors at year end.
From the information given above prepare for the three years:
a.
A Bad Debts Account;
b.
A Provision for Bad Debts Account;
c.
Relevant extracts of the Profit and Loss Accounts;
d.
Balance Sheet Extracts.
2.

During the year ended 31 May 2001 T.Hili, a sole trader, incurred the
following bad debts :
P. Sammut Lm25, T.Ebejer Lm31; F.Abela Lm18; G.Galea Lm43; T.Tanti
Lm52.
At the close of business on 31 May 2000, T.Hilis Provision for Bad and
Doubtful debts had a balance of Lm130. At the close of business on 31
May 2001 his debtors amounted to Lm3840 and on this date T.Hili
decided to increase the Provision for Bad and Doubtful Debts to 5% of
the debtors (Lm3840).
You are required:
a.

b.

Draw up the Bad Debts Account and the Provision for Bad
Debts Account for the year ended 31 May 1999, showing the
amounts to be transferred to the Profit and Loss Account.
Distinguish between Bad Debts and Bad Debts Provision.

Pg.38

3.

A business had always made a provision for bad debts at the rate of 5%
of debtors. On 1 January 2000 the provision for bad debts brought
forward from the previous, was Lm200. During the year to 2000 the
bad debts written off amounted to Lm500. On 31 December 2000 the
remaining debtors totalled 6,000 and the usual provision for bad debts
is to be made.
You are to show for 2000:
(a) the bad debts account;
(b) the provision for bad debts account;
(c) Profit and Loss extract and Balance Sheet extract.

Pg.39