Final Accounts – Provision for Doubtful Debts

 

Welcome to class! 

In today’s class, we will be talking about final accounts – provision for doubtful debts. Enjoy the class!

Final Accounts – Provision for Doubtful Debts

Final Accounts | classnotes.ng

PROVISION FOR DOUBTFUL DEBTS

Although debt may not actually have become bad, there may be a doubt as to whether it will be paid.  It would be misleading to include that debt as an asset in the balance sheet pretending that the amount is not in doubt.  On the other hand, since it has not yet become bad, it would be wrong to write it off.  A provision is therefore made to cover such doubtful debt.

Provision for doubtful debt is a mere estimate of the total debt that may not be collected from the debtor.  This estimated expense for bad debts which cannot be calculated with substantial accuracy is charged to the profit and loss account as an expense.

HOW TO CREATE AND MAINTAIN A PROVISION FOR DOUBTFUL DEBTS
  • When the provision for doubtful debt is first created:

Debit              Profit and Loss Account

Credit            Profit for doubtful debts Account

with the full amount of the provision

In the years that follow, the entries in the accounts will be for increases or decreases in the amounts required for the provision.

  • Increasing the provision of doubtful debts:

Debit              Profit and Loss Account

Credit            Profit for doubtful debts Account

with increases in the provision.

  • Decreasing the provision of doubtful debts:

Debit              Profit for doubtful debts Account

Credit            Profit and Loss Account

with decreases in the provision.

In all the instances (A-C) as described above, the provision for Doubtful Debts is deducted

from the Debtors in the Balance Sheet.

Evaluation

  1. Explain the following terms: (a) Bad debts             (b) Provision for doubtful debts
  2. List three types of provisions that could give rise to adjustments in the final accounts.
Illustration

A business starts on 1 January 2002 and its financial year-end is 31 December annually.  A table of the debtors, the bad debts are written off and the estimated doubtful debts at the end of each year are now given.

Year to                            Debtors at             Bad debts             Debts thought

31 December                 end of year           written off             at end of year

                                       (after bad debts   during the year     to be doubtful to

                                       written off)                                         collect

                                      N                          N                          N

2002                                       6,000                          423                             120

2003                                       7,000                          510                             140

2004                                       8,000                          604                             155

2005                                       6,400                          610                             130

You are required to show for each of the year ended 31st December……

(a)      Bad Debts Account

(b)      Provision for Doubtful Debts Account

(c)       Profit and Loss Account (extracts)

(d)      Balance Sheet (extracts)

 

Bad Debts

 

2002                                       N         2002                                       N

Dec. 31 Sundries                 423     Dec. 31 Profit and Loss     423

 

2003                                                   2003

Dec. 31  Sundries                510     Dec. 31 Profit and Loss     510

 

2004                                                   2004

Dec. 31 Sundries                 604     Dec. 31 Profit and Loss     604

 

2005                                                   2005

Dec. 31 Sundries                 610     Dec. 31 Profit and Loss     610

 

Provision for Doubtful Debts

2002                                       N         2002                                       N

Dec. 31 Balance c/d                     120     Dec. 31 Profit and Loss     120

 

2003                                                   2003

Dec. 31 Balance c/d                     140     Jan 1 Balance b/d 120

Dec 31 Profit and Loss        20

  • 140

 

2004                                                   2004

Dec. 31  Balance c/d                    155     Jan 1   Balance b/d          140

Dec. 31 Profit and Loss       15

  • 155

 

2005                                                   2005

Dec. 31 Profit and Loss       25      Jan. 1 Balance b/d                       155

“       “   Balance c/d                      130

155                                                     155

 

Profit and Loss Account (extracts) for the year ended 31st December

N                                                                    N

2002   Bad Debts                423

Provision for                         120

Doubtful debts

 

2003   Bad Debts                510

Increase in

Provision for

Doubtful debts        20

 

2004   Bad Debts                604

Increase in provision

For Doubtful debts   15

 

2005   Bad Debts                610                 2005   Reduction in the provision

for Doubtful Debts             25

 

Balance Sheet (extracts) as at 31st December

N                     N

2002               Debtors                     6,000

Less: Provision

For Doubtful Debts     120             5,880

 

2003               Debtors                     7,000

Less: Provision for

Doubtful Debts          140              6,860

 

2004               Debtors                     8,000

Less: Provision for

Doubtful Debts       155                7,845

 

2005               Debtors                     6,400

Less: Provision for

Doubtful Debts          130              6,270

Evaluation

  1. Differentiate between provision for bad debts and provision for depreciation.
  2. List two characteristics of provisions in financial accounting.

 

 

In our next class, we will be talking about Final Accounts – Provision for Discounts.  We hope you enjoyed the class.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

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