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    Bad Debts and Provision For Doubtful Deb

    Uploaded by

    Laghari Shafquat
    Bad debts are debts that are considered uncollectable and must be written off as a loss. A provision for doubtful debts is an estimate of debts that may not be paid and is deducted from total receivables on the balance sheet. When actual bad debts are written off, accounts are debited and credited to remove the amount from receivables and recognize the loss. The provision is adjusted based on changes to receivables or collection policy through income statement accounts. Businesses should take steps to minimize bad debts such as checking references, setting credit limits, promptly sending invoices and statements, and following up on overdue payments.

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    Bad Debts and Provision For Doubtful Deb

    Uploaded by

    Laghari Shafquat
    33 views3 pages
    Bad debts are debts that are considered uncollectable and must be written off as a loss. A provision for doubtful debts is an estimate of debts that may not be paid and is deducted from total receivables on the balance sheet. When actual bad debts are written off, accounts are debited and credited to remove the amount from receivables and recognize the loss. The provision is adjusted based on changes to receivables or collection policy through income statement accounts. Businesses should take steps to minimize bad debts such as checking references, setting credit limits, promptly sending invoices and statements, and following up on overdue payments.

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    Bad debts are debts that are considered uncollectable and must be written off as a loss. A provision for doubtful debts is an estimate of debts that may not be paid and is deducted from total receivables on the balance sheet. When actual bad debts are written off, accounts are debited and credited to remove the amount from receivables and recognize the loss. The provision is adjusted based on changes to receivables or collection policy through income statement accounts. Businesses should take steps to minimize bad debts such as checking references, setting credit limits, promptly sending invoices and statements, and following up on overdue payments.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    33 views3 pages

    Bad Debts and Provision For Doubtful Deb

    Uploaded by

    Laghari Shafquat
    Bad debts are debts that are considered uncollectable and must be written off as a loss. A provision for doubtful debts is an estimate of debts that may not be paid and is deducted from total receivables on the balance sheet. When actual bad debts are written off, accounts are debited and credited to remove the amount from receivables and recognize the loss. The provision is adjusted based on changes to receivables or collection policy through income statement accounts. Businesses should take steps to minimize bad debts such as checking references, setting credit limits, promptly sending invoices and statements, and following up on overdue payments.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Bad Debts and Provision for Doubtful Debts

    Bad Debts and Provision for Doubtful Debts


    Note: Bad Debts and Provision for Doubtful Debts are not the same thing

    Bad Debts

    A bad debt is a debt owing to a business that it considers will never be paid

    If a firm has trade receivables to the total of 10,000 from a number of peoples
    accounts some of these could become bad (not collectable). These must then be
    written off and the company must accept the loss

    Therefore you should: -

    DEBIT bad debtors written off account

    CREDIT the trade receivables account

    with the relevant amount to be written off.

    At the end of the year you should

    DEBIT The Income Statement

    CREDIT Bad Debts (written off) Account

    With the total bad debts account written off as a company expense

    This is in line with the concept of prudence which suggests that bad debts should be
    recognized as they arise.
    Provision for doubtful debts

    This is allowing for (hence the term provision) some of your trade rerceivables not
    paying their bills. The firm will usually choose a specific percentage of trade
    receivables based on previous experience, which can vary from business to
    business (you may think of banks and hire purchase companies which may use a
    higher figure).

    This procedure comes after writing off bad debts

    For example
    Trade Receivables ₤10,000
    Bad Debts ₤200
    ₤ 9,800
    Provision of 2% ₤ 196
    Balance sheet final total ₤ 9604
    The ₤196 is then
    Income Statement (as an expense called provision for doubtful debts)
    Credit Provision for bad debts account

    In the balance sheet it is then deducted as follows

    Balance Sheet of Nial Satis as at 31/12/2003

    Current Assets ₤ ₤ ₤

    Stock 10,000
    Trade Receivables 9800
    Less prov for bad debts 196
    9,604
    Prepayments 1,000
    Cash 2,500
    Bank 9,950
    33,054

    Adjustments to the Provision for Bad Debts


    Once a provision has been created the only adjustments needed are due to

    · Policy change in provision (increase or decrease in percentage)

    · Arithmetic adjustment in trade receivables total (this is quite likely each year)

    When this happens the amount of the provision may increase or decrease.

    An increase in provision for bad debts is recorded as follows


    DEBIT the difference (new provision minus old one) to Income Statement *
    CREDIT provision for bad debts

    * Note : In the Income Statement this is recorded as an increase in provision for bad
    debts and listed in expenses

    For the balance sheet the amount of the new increased provision is shown (i.e. the
    larger amount)
    An decrease in provision for bad debts is recorded as follows

    Debit the difference (old provision minus new one) to provision for bad debts

    Credit the Income Statement (this is recorded as reduction in provision of bad debt
    account under income)

    For the balance sheet the amount of the new provision is shown (i.e. the smaller
    amount)

    Minimising the risk of bad debts

    It is appropriate to look at ways in which businesses selling on credit can minimise


    the risks. The following are some of the procedures that can be followed:

    · When first approached by an unknown business wishing to buy goods on credit.


    the seller should ask for two references. One of these should be the buyer's bank,
    and the other a trader with whom the buyer has previously done business.

    · The seller, before supplying goods on credit, should take up both references and
    obtain satisfactory replies.

    · Once satisfactory replies have been received, a credit limit for the customer
    should be established, and an account opened in the sales ledger. The amount of
    the credit limit will depend very much on the expected amount of future business - for
    example, £1,000 might be appropriate. The credit limit should not normally be
    exceeded - the firm's credit controller or financial accountant will approve any
    transactions above the limit.

    · Invoices and month-end statements of account should be sent out promptly;


    invoices should state the terms of trade, and statements should analyze the balance
    to show how long it has been outstanding, e.g. 'over 30 days, over 60 days, over 90
    days' - computer produced statements can show this automatically.

    · If a customer does not pay within a reasonable time, the firm should follow
    established procedures in' order to chase up the debt promptly. These procedures
    are likely to include 'chaser' letters, the first of which points out that the account is
    overdue, with a later letter threatening legal action. Whether or not legal action is
    taken will depend on the size of the debt - for a small amount the costs and time
    involved in taking legal action may outweigh the benefits of recovering the money.

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