RIZWAN KARIM CHUGHTAI

O/A LEVEL ACCOUNTING 03017464500

Bad Debts/Irrecoverable debts and Provision for bad

debts/doubtful debts.
Bad debts/ Irrecoverable debts:
A bad debt is a debt that is not recoverable after all the efforts have been made for its
collection. This maybe arise for example, as a result of the,
➢ Insolvency of a credit customer
➢ Bankruptcy of a credit customer
Accounting treatment for bad debt/ Irrecoverable debts:
A bad debt is treated as an expense in the income statement and reduced the value of
receivables in the statement of financial position.
The general Journal entry is passed to record the write off accounts receivables as bad
debts.
DR-------------Bad Debts/Irrecoverable debts
CR--------------------Debtors/receivables
Transfer the balance of bad debts (Irrecoverable) account to the income statement the
journal entry,
DR------------- Income Statement
Cr-------------------- Bad Debts/Irrecoverable debts
Irrecoverable debts recovered/ Bad debts recovered:
A bad debts that has been written off as irrecoverable in previous years maybe recovered
at a later date If the customer become able to pay. The customer’s account will be debit
and irrecoverable debts account credited with the amount recovered. The amount
received from customer may then be credited to his account and debited to cash book.
Accounting treatment for bad debt/ Irrecoverable debts recovered:
The irrecoverable debts recovered treated as income in income statement.
The general Journal entry is passed to record the bad debts/irrecoverable debts
recovered. (cancelling previous written of trade receivables)
DR-------------Receivables
CR-------------------- bad debts/irrecoverable debts recovered
Transfer the balance of Irrecoverable debts recovered account to the income statement
the journal entry,
DR------------- bad debts/irrecoverable debts recovered
Cr-------------------- Income Statement
Provision for bad or doubtful debts:
Doubtful debt is a debt due from a customer where it is uncertain whether or not it will be
repaid by them.
Business usually creates a provision for doubtful debts to provide for doubtful debts.
Provision for doubtful debts therefore reflects the proportion of trade receivables that the
business expects may not be recovered. The provision is supposed to show the likely size
of future bad debts.
The provision for doubtful debts is estimated amount calculated on trade receivables and
this amount is subtracted from trade receivables value on the statement of financial
position so as to give a more realistic figure for the amount likely to be received.
General Provision for bad or doubtful debts:
When there is no clear evidence that which trade receivable will not clear his debt. This
usually estimated on the basis of past trend and future expectation about receivables and
expressed as a % of closing balance of receivables.
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Specific Provision for bad or doubtful debts:

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 RIZWAN KARIM CHUGHTAI
O/A LEVEL ACCOUNTING 03017464500

When there is clear evidence that the particular receivable might turn be bad. The
creation of this provision is based on appraising the trade receivables on individual basis.

Factors consider for calculation of provision for doubtful debts:

➢ Economic climate – frequency of business failure
➢ The amount of debts outstanding from each customers
➢ How long of each debt has been outstanding
➢ Past record of each trade receivable
Reasons for why business create doubtful debts?
➢ To show the receivables at more realistic value in statement of financial position
➢ To estimate the future possible bad debts
➢ To apply the matching concept
➢ To apply the prudence concept
➢ To show the financial statements true and fair view
➢ To avoid the overstating of profits
Creation of doubtful debts:
When business creates the provision for doubtful debts initial year journal entry will be,
DR--------------- Income Statement
CR--------------- Provision for doubtful debts
Increase in provision for doubtful debts:
The estimated amount increased from last year estimation.
For e.g. last year, the debtors were $2,000. The provision for doubtful debts was $100.
Scenario 1: During the year, the debtors are $3,000. If you remember Step 1 in the
previous post, we will need to calculate the provision of doubtful debts. In this case,
$3000 x 5% = $150Now, compare this $150 with previous year of $100. There is
an increase in provision for doubtful debts of $50.Because the amounts of debts have
increased, more bad debts will be expected in the future. This is an increase in expense
and treated as an expense in income statement. In the Balance Sheet, receivables are
reduced by the amount of provision for doubtful debts for the year, which is $150.
DR--------------- Income Statement
CR--------------- Provision for doubtful debts
Decrease in provision for doubtful debts:
The estimated amount decrease from last year provision
Scenario 2: The amount of debtors for the year totaled to $1000. The provision for
doubtful debts is $50. Note: We are comparing with the $100 previous year, not with
$150 in Scenario 1.
You can see that this year provision for doubtful debts have decreased by $50 (100-
50.) This decrease is an income for the business.
Scenario 2: The amount of debtors for the year totaled to $1000. The provision for
doubtful debts is $50. Note: We are comparing with the $100 previous year, not with
$150 in Scenario 1.
You can see that this year provision for doubtful debts have decreased by $50 (100-
50.) This decrease is an income for the business. In the Balance Sheet, receivables are
reduced by the amount of provision for doubtful debts for the year, which is $100
DR--------------- Provision for doubtful debts
CR--------------- Income Statement
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 RIZWAN KARIM CHUGHTAI
O/A LEVEL ACCOUNTING 03017464500

Provision for doubtful debts and concepts:

Matching Concept:
Expenses are matched against revenues. Expenses against an income (e.g., bad debts are
an expense against sales income) should be recorded in the same accounting year, in
which that income is earned and recorded.

Prudence Concept:
Anticipated (future) losses should be recorded in the financial statements and anticipated
gains should not be recorded in the financial statements OR Incomes and assets
shouldn’t be overstated
Provision for bad debts is based on these two principles.

Note:
Increase in Provision for bad debts is recorded as an expense in income statement.
Decrease in Provision for bad debts is added in Gross Profit in income statement.
Total amount of provision for doubtful debts are subtracted from trade receivables in
statement of financial position.
The balance brought down (b/d) in provision account is always on credit side.

Ageing schedule:
The aging of trade receivables involves analyzing the individual accounts found in the
sales ledger.
Customers’ accounts categorised in an analysis sheet according to the length of time that
they have been outstanding.
A different percentage based on past experience and current market conditions is then
applied to each group.
The following is the ageing schedule for calculating for doubtful debts.

Age of debt Trade receivables % Doubtful debts

Up to 60days 20000 1 200

61 to 100days 15000 2 300

Over 100 days 10000 5 500

Provision for doubtful debts at the end of year 1000

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