BaddebtsandProvisionforBaddebtsBadDebtsWhenthefirmfindsthatitisimpossibletocollectadebt,thatdebtshouldbewrittenoffasabaddebt.AccountingEntries:DrBadDebtsCrDebtorWiththeirrecoverableamountofadebtExampleDuringtheyear,acompanysoldgoodsfor$2,000toMr.Lee,$1,500toMr.Wongand$300toMr.Wu.Mr.LeeandMr.Wongpaidthecompany$800and$1,000respectivelyLater,Mr.WongandMr.Wubecamebankrupt,anditisimpossibleforthecompanytocollectthesedebts.Thecompanydecidedtowritetheseoffasbaddebts.Mr.Lee$$

Bank 800 Mr.Wong$$Sales 1,500

Bank 1,000 Sales 2,0002,0002,000Balancec/f 1,200BadDebts 500Mr.Wu$$Sales 300

BadDebts 300

BadDebts$$Mr.Wong500Mr.Wu300P/L

8008008001,5001,500B.ProvisionforBad/DoubtfulDebtsAprovisionforbadanddoubtfuldebtsmaybemadewhenafirmthinksthattherewillbeproblemsinrecoveringadebt.AccountingentriesIncreaseinprovisionDrProfitandLossCrProvisionforBadDebtsWiththeincreaseintheamountofprovisionforbaddebtsDecreaseinprovisionDrProvisionforBadDebtsCrProfitandLossWiththedecreaseintheamountofprovisionforbaddebtsIncreaseinprovisionforbaddebts

Example

Afirmdecidedtomakeaprovisionforbaddebtsat10%ofthedebtors’accountswhichtotalled$50,000on31December1994. On31December1995,thedebtorsaccountstotalled$60,000.Thefirmmaintainedtheprovisionat10%ofitstotaldebtors.ProvisionforBadDebts1994 $1994 $Dec31Balancec/d5,000 ($50,000*10%)

Dec31Profitandloss 5,000

ProfitandLossAccountfortheyearended31December(Extract)GrossprofitLess:ExpensesIncreaseinprovisionforbaddebt5,000$X$BalanceSheetasat31December(Extract)1994CurrentAssets1994DebtorsLess:provisionforbaddebt50,0005,00045,000ProvisionforBadDebts1994 $1994 $Dec31Balancec/d5,000 ($50,000*10%)

Dec31Profitandloss 5,000

1995Dec31Balancec/f ($60,000*10%)6,0001995Jan1Balanceb/d 5,000Dec31ProfitandLoss1,0006,0006,000ProfitandLossAccountfortheyearended31December(Extract)GrossprofitLess:ExpensesIncreaseinprovisionforbaddebt5,000$X$19941995$$X1,000BalanceSheetasat31December(Extract)CurrentAssets1994DebtorsLess:provisionforbaddebt50,0005,00045,000199560,0006,00054,000DecreaseinProvisionforbaddebts

Example

Thedebtors’accountson31December1996totalled$40,000.Thefirmdecidedtomaintaintheprovisionat10%ofthetotaldebtors.ProvisionforBadDebts1994 $1994 $Dec31Balancec/d5,000 ($50,000*10%)

Dec31Profitandloss 5,000

1995Dec31Balancec/f ($60,000*10%)6,0001995Jan1Balanceb/d 5,000Dec31ProfitandLoss1,0006,0006,0001996 $1996 $6,000Jan1Balb/f 6,000Dec31ProfitandLoss2,0006,000Balancec/f($40,000*10%)

4,000ProfitandLossAccountfortheyearended31December(Extract)GrossprofitLess:ExpensesIncreaseinprovisionforbaddebt5,000$X$19941995$$X1,0001996$$XAdd:Decreaseinprovisionforbaddebts2,000BalanceSheetasat31December(Extract)CurrentAssets1994DebtorsLess:provisionforbaddebt50,0005,00045,000199560,0006,00054,000199640,0004,00036,000C.BadDebtsRecoveredBaddebtsrecoveredreferstodebtsformerlywrittenofftoberecoveredlater.AccountingentriesDrDebtorsCrBadDebtsRecoveredWiththedebtreinstatedinthedebtor’saccountDrCash/BankCrDebtorsWiththeamountreceivedDrBadDebtsRecoveredCrBadDebtsORDrBadDebtsRecoveredCrProfitandLossWiththedebtwrittenoffinthisyeartoberecoveredORWiththedebtwrittenoffinapreviousyeartoberecoveredExampleThefollowingbalanceswerepartofthetrialbalanceofMr.Chanon31December1996:

$ Debtors 10,000 BadDebts 1,000

Duringtheyear,Mr.Chanreceived$300and$1,200fromdebtors,whosedebtshadbeenpreviouslywrittenoffasbaddebtsinthecurrentyearandlastyearrespectively.Noentryhasbeenmadeforthesetransactions

Bank1996$Dec31 Debtors

1,500

Debtors1996$Dec31Balb/d 10,0001996$Dec31Bank 1,500Dec31B.D.R. 300Dec31B.D.R. 1,200

BadDebt1996$Dec31Balb/d 1,0001996$Dec31B.D.R. 300Dec31P&L 700BadDebtRecovered