Bad Debts & Provision for Doubtful Debts

Bad Debt
A debt that is not recovered after all the efforts have been made for its
collection
Usually as a result of inslovency or bankrupcy of a receivable

Treatment
Shown as an expense in Income Statement
Reduces the value of Trade Receivables in Balance Sheet

The Journal
Date Account Title Debit Credit
5-Jul Bad Debt 5,000
Receivable 5,000
 Doubtful Debt
Where there is a possibility that a trade receivable might become
irrecoverable

Provision for Doubtful Debts

Estimated amount of debt that a company expects to turn bad. Therefore
the company creates a provision / allowance

● Provision for Doubtful Debt is charged on the basis of:

○ Ageing Schedule : the older a debt gets, lesser the chance of receiving it
○ Financial Condition of customers
○ Industry Average
○ Previous trend of Bad Debt
● Types of Provisions

○ Specific Provision
Shows that a particular trade receivable might turn bad

○ General Provision
No clear evidence which trade receivable will turn bad
Usually expressed as a % of trade receivables

Order of Entries
1) Record Bad Debts
Then charge provision on the remaining Trade Receivables in following order
2) Specific Provision
3) General Provision on the remaining trade receivables
 Provision for Doubtful Debts
Date $ Date $
2) Balance c/d xx 1) Income Statement (↑) xx
↓
to be transferred to SOFP xx xx
subtracted from Trade Receivable

General Journal entry to create a Provision for Doubtful Debts (expense)

The Journal
Date Account Title Debit Credit
5-Jul I/S (expense) 500
Pro for DD 500
 Provision for Doubtful Debts
Date $ Date $
1) Balance b/d
2) Balance c/d 3) Income Statement (↑)
↓
to be transferred to SOFP
subtracted from Trade Receivable

General Journal entry to record ↑ in Provision for Doub ul Debts (expense)

The Journal
Date Account Title Debit Credit
5-Jul I/S (expense) 500
Pro for DD 500
 Provision for Doubtful Debts
Date $ Date $
3) Income Statement (↓) 1) Balance b/d
2) Balance c/d
↓
to be transferred to SOFP
subtracted from Trade Receivable

General Journal entry to record ↓ in Provision for Doubtful Debts (income)

The Journal
Date Account Title Debit Credit
5-Jul Pro for DD 500
I/S (income) 500
● Reasons for making provision

○ Prudence Concept
Doubtful debts reduce the realisable value of Receivables so it should be
provided for to avoid Overstatement of Assets and Profits

○ Matching Concept
As some amount will not be received, therefore a provision is made to
match against the irrecoverable debt
 Bad Debts Recovered
Sometimes a business receives a pleasant surprise when it recovers the
debts which were previously written off as bad debts

There are 2 ways to record this

1a) Recording receipt of cash from a Trade Receivable previosuly written off
Date Account Title Debit Credit
5-Jul Cash 500
Trade Rec 500

1b) Cancelling the previous entry made to write off Trade Receivable
Date Account Title Debit Credit
5-Jul Trade Rec 500
Bad Debt Recovery 500

OR
2) One single entry is passed

Date Account Title Debit Credit

5-Jul Cash 500
Bad Debt Recovery 500