Back to: FINANCIAL ACCOUNTING SS2
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
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
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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
- Explain the following terms: (a) Bad debts (b) Provision for doubtful debts
- 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
- Differentiate between provision for bad debts and provision for depreciation.
- 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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