Principle of

Topic: Adjustment to the

Accounting
Account
 Adjustment to the Account
ACCOUNTS NON-CURRENT
ACCRUALS PREPAYMENTS
RECEIVABL ASSET
E

Accrued Prepaid Revenue Allowance for Depreciation

Revenue - CA - CL Doubtful expense
Debt

Increase in AFDD
Accrued Expense Prepaid Expense
– Expense (Bad Straight line
- CL - CA
Debts)

Decrease in Reducing
AFDD - Revenue balance

Bad debts
recovered - Accumulated
Revenue
Depreciation
2
DEPRECIATION
Textbook Chapter 10 Depreciation of non-current asset page 134

3
Learning
Objectives
After completing this topic, you should be able to:

• Explain the term depreciation

• Identify the causes of depreciation
• Describe the factors to be considered to calculate depreciation
• Compute the amount of depreciation using the straight-line method
and the reducing balance method
• Record the depreciation in the journal, ledger and financial
statement
4
DEPRECIATION
EXPENSE
• MFRS 116 defines depreciation as the allocation of the depreciable amount over
its estimated useful life.
• Depreciable amount = Cost – salvage value
• Salvage value is the value of the non-current assets at the end of its useful life
• Non-current assets should be depreciated because it has been used up during an
accounting period and to avoid overstating the value of the assets in SOFP (the
value of brand new machine would not be the same as the value of 5 years old of
similar machine)
• Two methods
• Straight-line method
• Reducing balance method
5
CAUSES OF
DEPRECIATION
• Due to wear and tear (the physical usage of a non-current asset)
• Obsolescence – The Non current asset becoming out of date or obsolete because
of new technology advancement
• Due to physical factors – eg. Flood or excessive heat or cold
• Defluxion of time (fixed limit of ownership of assets like patents and copyright)

6
Factor to be considered in determining
depreciation expenses
The following factors should be considered in determining depreciation
expenses:
a) Cost of the non-current assets which includes:
I. Purchase price of asset
II. Transportation cost to get the assets to the purchaser’s premises
III. Insurance on the purchase of the assets
IV. Taxes on the purchase of the assets.
V. Installation cost of the assets
VI. Other costs directly incurred to bring the assets to its intended use and
location
b) Useful life of the assets
c) Scrap Value or salvage value or residual value of the assets.
7
Straight-line method
• Under this method, the amount of depreciation for each accounting period is the
same.
• Depreciation expense per year
= (Cost – salvage value) ÷ estimated useful life is years or
= Annual depreciation rate % x (Cost – salvage value)
• Depreciation expense per year will be treated as and EXPENSE (SOPL – Operating
Expenses)

8
Cost of the machine = RM 55,000
Depreciation policy = 15% using SLM
Calculate the Depreciation Expense for Y1, Y2, Y3

Depreciation Expense
= 15% x 55,000
= 8,250 p.a

Y1 = 8,250
Y2 = 8,250
Y3 = 8,250
Example
10.1
• Anisah bought a van for RM 45,000. The estimated useful life of the
van was eight years. At the end pf the eight years, the residual value
of the van was RM 5,000 Calculate the annual and monthly
depreciation value of the van.
• Depreciation per year = (RM 45,000 – RM 5,000) / 8 year
= RM 5,000
• Depreciation per month = RM 5,000/12
= RM 416.67

12
REDUCING-BALANCE
method
• Under this method, the amount of depreciation for each accounting period will
be different. A greater amount of depreciation is charged in the earlier
accounting years and smaller amount of depreciation is charged in the later
accounting years.
• Depreciation expense per year
= Annual depreciation rate% x (Cost – accumulated depreciation)
• Depreciation expense per year will be treated as and EXPENSE (SOPL – OPEX)

13
Example
10.2
• Ali Enterprise purchased office machinery for RM 24,000 on 1 January
20X0. The owner decided to depreciate the machinery at 10% per annum
using the reducing balance method. The accounting period ends 31
December each year. Calculate depreciation for the year 20X0, 20X1 and
20X2.
• Depreciation for 20X0 = RM 24,000x 10%
= RM 2,400
• Depreciation for 20X1= (RM 24,000 - RM 2,400) x 10%
= RM 2,160
• Depreciation for 20X2 = (RM 24,000 – RM 2,400 – RM 2,160) x 10%
= RM 1,944
14
Depreciation Expense

Non Current Depreciation Accumulated

Assets Expense Depreciation

Machine
20X0 10 %x 24,000 2,400 2,400
20X1 10% x (24,000 – 2,400) 2,160 4,560
20X2 10% x (24,000 – 4,560) 1,944 6,504
ACCUMULATED
DEPRECIATION
• Accumulated depreciation is the total depreciation for a non-current asset
that has been charged to expense since that asset was acquired and made
available for use.
• The accumulated depreciation account is a contra asset account with a credit
balance. It appears on the SOFP in the non-current assets section.
• The amount of accumulated depreciation for a non-current asset will increase
over time, as depreciation continues to be charged against the asset.
• In the SOFP, the carrying amount for each non-current asset will be
determined by taking the cost amount less with the current year accumulated
depreciation.

16
Acounting entries for non-current assets &
Depreciation expenses
a) Upon non-current assets acquisition
Dr Non-Current Assets
Cr Cash/ Account Payable
b) Depreciation expenses for the month/year
Dr Depreciation Expenses
Cr Accumulated Depreciation
c) Close depreciation to Statement of Profit or Loss
Dr Statement of Profit or Loss
Cr Depreciation Expenses

17
SOPL & SOFP Position
Presentation Statement of Profit or Loss for the year ended ..
(-) Operating Expenses: RM
Depreciation
XXX

Statement of Financial Position as at …

RM RM RM
Cost Accumulated Carrying
Value
Non Current Assets Depreciation
XXX

18
Illustration 1 (Straight Line
method)
A company purchase machinery on 1 February 20X1 for RM 10,000 by cheque.
The machinery was estimated to last for 5 years. The accounting year end of the
company is on 31 December.
(a) Using Straight line method, calculate the depreciation expenses for the
estimated scrap value of the machinery is RM 1,000. Record the transaction for
the year ended 31 December 20X1 and 31 December 20X2 if the full year
depreciation is charged in the year of purchase (year basis)
Year ended 31/12/20X1
Depreciation per year
= (RM 10,000 – RM
1,000) / 5 year
= RM 1,800

Year ended 31/12/20X2

Depreciation per year
= (RM 10,000 – RM
1,000) / 5 year
= RM 1,800` 19
Journal
Entry
Date Particular Debit (RM) Credit (RM)
1 Feb 20X1 Dr Machinery Acc. 10,000
Cr Bank 10,000
31 Dec 20X1 Dr Depreciation – Machinery Acc. 1,800
Cr Acc. Depreciation – Machinery Acc. 1,800
31 Dec 20X1 Dr Statement of Profit or Loss 1,800
Cr Depreciation – Machinery Acc. 1,800
31 Dec 20X2 Dr Depreciation – Machinery Acc. 1,800
Cr Acc. Depreciation – Machinery Acc. 1,800
31 Dec 20X2 Dr Statement of Profit or Loss 1,800
Cr Depreciation – Machinery Acc. 1,800

20
 Machinery a/c
Date RM Date RM
1/2/X1 Bank 10,000 31/12/X2 Balance c/d 10,000
10,000 10,000
1/1/X2 Balance b/d 10,000 31/12/X2 Balance c/d 10,000
10,000 10,000
1/1/X3 Balance b/d 10,000

Depreciation - Machinery a/c

Date RM Date RM
31/12/X1 Accumulated Depreciation – 31/12/X1 Statement of Profit or Loss
Machinery Acc. 1,800 1,800
31/12/X2 Accumulated Depreciation – 31/12/X2 Statement of Profit or Loss
Machinery Acc. 1,800 1,800

Accumulated Depreciation - Machinery a/c

Date RM Date RM
31/12/X1 Balance c/d 1,800 31/12/X1 Depreciation – Machinery Acc. 1,800

1/1/X2 Balance b/d 1,800

31/12/X2 Balance c/d 3,600 31/12/X2 Depreciation – Machinery Acc. 1,800
3,600 3,600
21
 Statement of Profit or Loss for the year ended 31 December 20X1
(-) Operating Expenses: RM
Depreciation 1,800

Statement of Financial Position as at 31 December 20X1

RM RM RM
Cost Accumulated Depreciation Carrying Value
Non Current Assets
Machinery (10,000)(1,800) 10,000 1,800 8,200

Statement of Profit or Loss for the year ended 31 December 20X2

(-) Operating Expenses: RM
Depreciation 1,800
Statement of Financial Position as at 31 December 20X2
RM RM RM
Cost Accumulated Depreciation Carrying Value
Non Current Assets
Machinery (10,000)(1,800+1,800) 10,000 3,600 6,400
22
Illustration 2 (Reducing Balance
method)
A company purchase fixture by cheque for RM 50,000 on 1 April
20X2. Depreciation was charged at the rate of 10% per annum using
the reducing balance method. The accounting year end of the
company is on 30 June each year. Record the transaction for the
year ended 30 June 20X2 and 30 June 20X3 if the full year
Depreciation is charged in the year of purchase (year basis).
= (RM 50,000 ) x 10% Year ended 30 June 20X3 ( Second year)
= RM 5,000 Depreciation per year
= (RM 50,000 – RM 5,000) x 10%
= RM 4,500

23
Journal
Entry
Date Particular Debit (RM) Credit (RM)
1 April 20X2 Dr Fixture Acc. 50,000
Cr Bank 50,000
30 June 20X2 Dr Depreciation – Fixture Acc. 5,000
Cr Acc. Depreciation – Fixture Acc. 5,000
30 June 20X2 Dr Statement of Profit or Loss 5,000
Cr Depreciation – Fixture Acc. 5,000
30 June 20X3 Dr Depreciation – Fixture Acc. 4,500
Cr Acc. Depreciation – Fixture Acc. 4,500
30 June 20X3 Dr Statement of Profit or Loss 4,500
Cr Depreciation – Fixture Acc. 4,500

24
 Fixtures a/c
Date RM Date RM
1/4/X2 Bank 50,000 30/06/X2 Balance c/d 50,000
50,000 50,000
1/7/X2 Balance b/d 50,000 30/06/X3 Balance c/d 50,000
50,000 50,000
1/7/X3 Balance b/d 50,000

Depreciation - Fixture a/c

Date RM Date RM
30/06/X2 Accumulated Depreciation – 30/06/X2 Statement of Profit or Loss
Fixture Acc. 5,000 5,000
30/06/X3 Accumulated Depreciation – 30/06/X3 Statement of Profit or Loss
Fixture Acc. 4,500 4,500

Accumulated Depreciation - Fixture a/c

Date RM Date RM
30/06/X2 Balance c/d 5,000 30/06/X2 Depreciation – Fixture Acc. 5,000

1/7/X2 Balance b/d 5,000

30/06/X3 Balance c/d 9,500 30/06/X3 Depreciation – Fixture Acc. 4,500

9,500 9,500
25
 Statement of Profit or Loss for the year ended 30 June 20X2
(-) Operating Expenses: RM
Depreciation – Fixture 5,000

Statement of Financial Position as at 30 June 20X2

RM RM RM
Cost Accumulated Depreciation Carrying Value
Non Current Assets
Fixture (50,000)(5,000) 50,000 45,000

5,000
(-) Operating Expenses: RM
Statement of Profit or Loss for the year ended 30 June 20X3
Depreciation - Fixture 4,500
Statement of Financial Position as at 30 June 20X3
RM RM RM
Cost Accumulated Depreciation Carrying Value
Non Current Assets
Fixture (50,000)(5,000+4,500) 50,000 9,500 40,500
26
ACCRUALS &
Prepayment
Textbook Chapter 8 Adjustment for Accrual & Prepayment

27
Learning
Objectives
• After completing this topic, you should be able to:
• Analyze the effect of expenses incurred, but not paid during the accounting
period
• Analyze the effect of income receivable, but not received
during the accounting period
• Analyze the effect of expenses paid in advance and income
received in advance of the accounting period

28
PREPAID
EXPENSE
• Prepaid expense is the payment for expenses that have not been incurred in the
current accounting period, but will be incurred in the next accounting period.
• It is treated as the CURRENT ASSET in the SOFP.
• If the question mentioned that there is an prepaid expense, you need to DEDUCT
the prepaid expense amount from the respective expense account in the SOPL.

29
Example
8.1
ABC Trading took a yearly insurance policy of RM 600 on 1 June
20X2. Its accounting period ends 31 December each year. The
business has agreed to pay insurance premium at the rate of RM
Date of Payment Amount Paid (RM)
200
Month every 4 months. Payments made are as follows
1 June 20X2 200 June 20X2 to September 20X2
1 October 20X2 200 October 20X2 to January 20X3

Show the appropriate adjusting entries on 31 December 20X2

Monthly insurance premium : RM 600/12 = RM 50

Insurance expense : 1 June to 31 December 20X2
: 7 month x RM 50 = RM 350
Prepaid Insurance : 1 January 20X3
:1 month x RM 50 = RM 50

30
Journal
Entry
Date Particular Debit (RM) Credit (RM)
To record the insurance expenses paid
1 June 20X2 Dr Insurance Expenses 200
Cr Bank 200
To record the insurance expenses paid
1 Oct 20X2 Dr Insurance Expenses 200
Cr Bank 200
To record the prepaid insurance
31 Dec 20X2 Dr Prepaid Insurance 50
Cr Insurance Expense 50
To transfer the insurance expenses to statement of profit or loss
31 Dec 20X2 Dr Statement of Profit or Loss 350
Cr Insurance Expense 350

31
 Insurance Expenses a/c
Date RM Date RM
1/6/X2 Bank 200 31/12/X2 Prepaid Insurance 50
1/10/X2 Bank 200 31/12/X2 Statement of Profit or Loss 350
400 400

Prepaid Insurance a/c

Date RM Date RM
31/12/X2 Insurance Expense 50 31/12/X2 Balance c/d 50

1/1/X3 Balance b/d 50

Statement of Profit or Loss for the year ended 31 December 20X2

(-) Operating Expenses: RM
Insurance Expenses (400-50)

Statement of Financial Position as at 31 December 20X2 350

RM
Current Asset
Prepaid Insurance 50
32
ACCRUED
EXPENSE
• Accrued expense is the amount of expense that has been incurred during the
accounting period but the payment has not been made.
• It is treated as CURRENT LIABILITY in the SOFP.
• If the question mentioned that there is an accrued expense, you need to ADD
the accrued expense amount to the respective expense account in the SOPL

33
Example
8.2
ABC Trading rented a stall on 1 October 20X2 for RM 100 per month payable at
the end of each month. Its accounting period ends 31 December each year.
Payments made are as follows :
Date of Payment Amount Paid (RM) Month
31 October 20X2 100 October 20X2
30 November 20X2 100 November 20X2
5 January 20X3 100 December 20X2

Rental for the month of December 20X2 was only paid in January 20X3.
Show the appropriate adjusting entries on 31 December 20X2

Rental Expenses : RM 300 (October, November & December)

Rental Paid : RM 200 (October & November)
Accrued Rental : RM 100 (December)

34
Journal
Entry
Date Particular Debit (RM) Credit (RM)
To record rental expenses paid
31 Oct 20X2 Dr Rental Expenses 100
Cr Bank 100
To record the rental expenses paid
30 Nov 20X2 Dr Rental Expenses 100
Cr Bank 100
To record the accrued rent expense
31 Dec 20X2 Dr Rent Expense 100
Cr Accrued Rent Expense 100
To transfer the insurance expenses to statement of profit or loss
31 Dec 20X2 Dr Statement of Profit or Loss 300
Cr Rent Expense 300

35
 Rent Expenses a/c
Date RM Date RM
31/10/X2 Bank 100
30/11/X2 Bank 100
31/12/X2 Accrued Rent 100 31/12/X2 Statement of Profit or Loss 300
300 300

Accrued Rent Expenses a/c

Date RM Date RM
31/12/X2 Balance c/d 100 31/12/X2 Rent Expense 100

1/1/X3 Balance b/d 100

Statement of Profit or Loss for the year ended 31 December 20X2

(-) Operating Expenses: RM
Rent Expenses (200+100)
300
Statement of Financial Position as at 31 December 20X2
RM
Current Liabilties
Accrued Rent 100
36
PREPAID
REVENUE
• Prepaid revenue is the payment that has been received for the goods that will be
sold or services that will be provided in the next accounting period.
• It is also known as Unearned Revenue or Revenue Received in Advance.
• It is treated as CURRENT LIABILITY in SOFP.
• If the question mentioned that there is an prepaid revenue, you need to DEDUCT
the accrued revenue amount from the respective revenue account in the SOPL.

37
Example
8.3
ABC Trading rented out part of its office on 1 October 20X2 for RM 200 per
month which is receivable at the end of each month. Its accounting period ends
31 December each year. Rentals received are as follows :
Date of Payment Amount Paid (RM) Month
31 October 20X2 200 October 20X2
30 November 20X2 200 November 20X2
31 December 20X2 400 December 20X2 & January 20X3

Show the appropriate adjusting entries on 31 December 20X2

Rental Income : RM 600 (October, November & December)

Rental Received : RM 800 (October, November, December & January)
Prepaid Rental : RM 200 (January)
Income
38
Journal
Entry
Date Particular Debit (RM) Credit (RM)
To record rental income received
31 Oct 20X2 Dr Bank 200
Cr Rental Income 200
To record the rental income received
30 Nov 20X2 Dr Bank 200
Cr Rental Income 200
To record the prepaid revenue income
31 Dec 20X2 Dr Rent Income 200
Cr Prepaid Rent Income 200
To transfer the insurance expenses to statement of profit or loss
31 Dec 20X2 Dr Rent Income 600
Cr Statement of Profit or Loss 600

39
 Rent Income a/c
Date RM Date RM
31/12/X2 Prepaid Rental Income 200 31/10/X2 Bank 200
31/12/X2 Statement of Profit or Loss 600 30/11/X2 Bank 200
31/12/X2 Bank 400
800 800

Prepaid Rent Income a/c

Date RM Date RM
31/12/X2 Balance c/d 200 31/12/X2 Rental Income 200

1/1/X3 Balance b/d 200

Statement of Profit or Loss for the year ended 31 December 20X2

(+) Other Income: RM
Rent Income (800-200)
Statement of Financial Position as at 31 December 20X2 600
RM
Current Liabilties
Prepaid Rental Income 200
40
ACCRUED
REVENUE
• Accrued revenue is a revenue earned from goods sold or services performed but
the payment has not been received.
• It is treated as CURRENT ASSET in the SOFP.
• If the question mentioned that there is an accrued revenue, you need to ADD the
accrued revenue amount to the respective revenue account in the SOPL.

41
Example
8.4
XYZ Trading rented out part of its office on 1 October 20X2 for RM 300 per
month which is receivable at the end of each month. Its accounting period ends
31 December each year. Rentals received are as follows :
Date of Payment Amount Paid (RM) Month
31 October 20X2 300 October 20X2
30 November 20X2 300 November 20X2
10 January 20X3 300 December 20X2

Show the appropriate adjusting entries on 31 December 20X2

Rental Income : RM 900 (October, November & December)

Rental Received : RM 600 (October, November)
Accrued Rental : RM 300 (December)
Income

42
Journal
Entry
Date Particular Debit (RM) Credit (RM)
To record rental income
31 Oct 20X2 Dr Bank 300
Cr Rental Income 300
To record rental income
30 Nov 20X2 Dr Bank 300
Cr Rental Income 300
To record the accrued rent income
31 Dec 20X2 Dr Accrued Rent Income 300
Cr Rent Income

300
To transfer the insurance expenses to statement of profit or loss
31 Dec 20X2 Dr Rent Income 900
Cr Statement of Profit or Loss 900 43
 Rent Income a/c
Date RM Date RM
31/10/X2 Bank 300
31/12/X2 Statement of Profit or Loss 900 30/11/X2 Bank 300
31/12/X2 Accrued Rental Income 300
900 900

Accrued Rent Income a/c

Date RM Date RM
31/12/X2 Rent Income 300 31/12/X2 Balance c/d 300
1/1/X3 Balance b/d 300

Statement of Profit or Loss for the year ended 31 December 20X2

(+) Other Income: RM
Rent Income (600+300)
900
Statement of Financial Position as at 31 December 20X2
RM
Current Assets
Accrued Rental Income 300
44
ACCOUNTS
RECEIVABLE
Textbook Chapter 9 Accounting for Accounts Receivable Page 116

45
Learning
Objectives
After completing this chapter, you should be able to:
• Explain the term allowance for doubtful debts
• Calculate the allowance for doubtful debts
• Define the term bad debts
• Explain the term bad debts recovered
• Record the allowance for doubtful debts, bad debts and
bad debts recovered in the journal and financial
statements

46
Introduction
• Selling of goods or services can be categorised into cash sales and
credit sales. Most of a business’s sales are on credit basis.
• The credit term allows debtors or receivables some time to pay back
their debts, normally between one to three months.
• Offering credit terms exposes a business to the risk of some
customers not paying for the goods sold or services rendered to
them.

47
Direct Write off method
• If it is proven that receivables cannot settle a debt even though
reminders have been sent to them, the amount that cannot be
recovered will be known as bad debts and must deducted from the
account.
• A bad debt considered as expenses to business in the year it was
written off and will be charged to the statement.

48
Example 9.1 In the books of a sole trader on 1 December 20X1, it was found that Ali and Ahmad owed RM 300
and RM 500 respectively. Reminder was sent to them but they failed to settle their debts. The sole trader
decided to write off the whole amount as bad debt on 31st December 20X1.

Date Particular Debit (RM) Credit

(RM)

To record bad debt written off from account receivable

1 Oct 20X2 Dr Bad debts 800
Cr Account Receivable - Ali

300
Cr Account Receivable - Ahmad

500
To close the bad debt expenses to statement of profit or loss
1 Oct 20X2 Dr Statement
Statement of
of Profit
Profit or
or Loss
Loss for the year ended 31 December 20X1
800
(-) Operating Expenses: Cr Bad Debts RM
Bad Debt Expenses (800) 800
800

49
ALLOWANCE FOR DOUBTFUL
DEBTS
• Allowance for Doubtful Debts is a contra current asset account associated with
Accounts Receivable.
• There are possibilities that a few receivables might not be able to settle the debts
related to them. Therefore, estimation should be made as to the amount that will
not be collectible in the year the sales occurred.
• One of the method used in estimating doubtful debts is the percentage
account
of receivable method.
• The estimation is important because those debts that cannot be collected within
one year should not be considered as current assets.
• Therefore, certain amount need to be reduced from the existing
receivables.
accounts
• AFDD is located in SOFP, exactly below the Accounts Receivable item.
• Allowance for doubtful debts = Account Receivable (net) x %.

50
 Example 9.2
A business started on 1 January 20X2. The accounting period ends 31 December each year. The total amount of account
receivable at the end of the accounting period is RM 20,000. It is estimated that 2% of these accounts receivable eventually
go bad due to certain reasons but there is no evidence whether these debtors are bankrupt or dead.

Allowance for doubtful debt = RM 20,000 x 2% = RM 400

Date Particular Debit (RM) Credit (RM)

To record the increase of doubtful debts estimation

Dr Doubtful debts 400
Cr Allowance for doubtful debts 400
To close the doubtful debt account to statement of profit or loss
Dr Statement of Profit or Loss 400
Cr Doubtful debts 400

Statement of Profit or Loss for the year ended 31 December 20X2

(-) Operating Expenses: RM
Doubtful debt (400)

Statement of Financial Position as at 31 December 20X2 400

Current Assets RM
Account Receivable 20,000
(-) Allowance for doubtful debts (400) 47
Increase in AFDD (Bad debts
expense)
• When dealing with AFDD, there are steps that need to be taken.
• Step 1: Identify whether there is any bad debts to written off (meaning, is there
any amount of bad debts that are confirmed could not be collected). If there is,
deduct the amount of bad debts written off from previous year’s AFDD. The same
amount should also be deducted from the Accounts Receivable amount.
• Step 2: Calculate the new AFDD based on the percentage given for the current
accounting year.
• Step 3: Find the change in AFDD by taking the new AFDD less with the previous
year’s AFDD.
• Step 4: If the change result in POSITIVE figure, the amount of change should be
treated as Bad Debts Expense (SOPL – OPEX)

52
Decrease in AFDD (OTHER
REVENUES)
• When dealing with AFDD, there are steps that need to be taken.
• Step 1: Identify whether there is any bad debts to written off (meaning, is there
any amount of bad debts that are confirmed could not be collected). If there is,
deduct the amount of bad debts written off from previous year’s AFDD. The same
amount should also be deducted from the Accounts Receivable amount.
• Step 2: Calculate the new AFDD based on the percentage given for the current
accounting year.
• Step 3: Find the change in AFDD by taking the new AFDD less with the previous
year’s AFDD.
• Step 4: If the change result in NEGATIVE figure, the amount of change should be
treated as Decrease in AFDD (SOPL – Other Revenues)

53
 Journal entries –
For the 1st year estimate
Allowance for
Dr. Doubtful debt (SOPL) xxx
Doubtful Debts
Cr. Allowance for doubtful debts (SOFP) xxx

To increase allowance for doubtful debt

Dr. Doubtful debt (SOPL) xxx
Cr. Allowance for doubtful debts (SOFP) xxx

To decrease allowance for doubtful debbt

Dr. Allowance for doubtful debts (SOFP) xxx
Cr. Doubtful debt (SOPL) xxx

54
Example 2: Allowance for doubtful
debts
• The table below shows the Trade receivables
trade receivables and 2019 RM 180,000
allowance for doubtful debt
2020 RM 250,000
as at 31 December
2021 RM 220,000
Allowance for doubtful
debts
2019 5%
2020 4%
2021 4%
55
• Determine the amount of allowance for doubtful debts as at
31 December of the respective years
Allowance for doubtful debts
2019 5% x RM180,000 RM 9,000
2020 4% x RM250,000 RM 10,000
2021 4% x RM220,000 RM 8,800

Allowance for doubtful debts

201 RM9,000 – RM 0 RM 9,000
9
202 RM 10,000 – RM 9,000 RM1,000 – Increase
0
202 RM 8,800 – RM 10,000 RM1,200 – decrease
1
56
 Example 2: Allowance for doubtful debts
Journal entries to record transactions – 31 December
First year estimation Debit (RM) Credit (RM)
2019 Dr. Doubtful debt 9,000
Cr. Allowance for doubtful debts 9,000
Increase in AFDD
2020 Dr. Doubtful debt 1,000
Cr. Allowance for doubtful debts 1,000
Decrease in AFDD
2021 Dr. Allowance for doubtful debts 1,200
Cr. Doubtful debt 1,200

57
 Example 2: Allowance for doubtful
debts
Allowance for doubtful debt account
2019: Balance c/d 9,000 2019: Bad debt 9,000

2020: Balance b/d 9,000

2020: Balance c/d 10,000 2020: Bad debt 1,000

2021: Bad debt 1,200 2021: Balance b/d 10,000

2021: Balance c/d 8,800

58
 Financial Statement
Extracts
Statement of Profit or Loss for year ended 31 December (Extract)
2019 2020 2021
(+) Other revenue:
Decrease in allowance for doubtful debt – Revenue 1,200
(-) Operating expenses:
Doubtful Debt 9,000
Increase in allowance for doubtful debt – expense 1,000

Statement of Financial Position as at 31 December (Extract)

2019 2020 2021
Account receivables 180,000 250,000 220,000
Less allowance for doubtful debt
Net Account Receivable (9,000) (10,000 (8,800)
171,000 ) 211,200
240,000 59
BAD DEBTS
RECOVERED
• Sometimes, the amount of Accounts Receivable that was already written off as
Bad Debts could be recovered.
• This occurs when the debtor comes forward and pay back the amount that was
uncollectible earlier.
• Therefore, the bad debts recovered is a payment received for a debt that was
written off and considered uncollectible.
• If the question indicates that there is any amount of bad debts recovered, it will
be treated as Other Revenue in the SOPL. At the same time, your cash or bank
will also increase because of the payment received from the debtor.

60
Journal
Example 9.5
Entry
Ali, whose account had been written off as bad debts, paid RM 300 by Cheque to settle the amount
owed by him on 1 October 20X2. The Accounting Period ends 31 December 20X2

Date Particular Debit (RM) Credit (RM)

To record the recovery of bad debts in the account receivable
1 Oct 20X2 Dr Acc. Receivable - Ali 300
Cr Bad Debt Recovered 300
To record the payment made by account receivable
1 Oct 20X2 Dr Bank 300
Cr Account Receivable - Ali 300
To close the bad debt recovered
31 Dec 20X2 Dr Bad Debt Recovered 300
Cr Statement of Profit or Loss 300

Statement of Profit or Loss for the year ended 31 December 20X2

(+) Other Income: RM
Bad Debt Recovered (300)
61
300