Bad debts
The amount of the debtors which cannot be recovered is known
as bad debt. At the end the accounting year, the amount of bad debt is shown as
an expense in the profit & loss account and deducted from the debtors. The
double entry for recording the bad debt is:
Debit
Bad debt account
Credit Debtors account
At the end of the year, while preparing the final accounts,
the bad debt account is transferred to the profit & loss account by passing
the following adjustment entry:
Debit
Profit & loss account
Credit Bad debt account
Provision for bad debts
(Provision for doubtful debts)
The provision created to cover the next year’s bad debt
expense out of the current year’s debtors is known as provision for bad debts.
This provision is created on the debtors after deducting the current year’s bad
debt. The double entries required for creating the provision for bad
debt are:
First
year Debit Profit & loss account and
Credit Provision for bad debts account.
Second year and subsequent
years:
For an increase in the provision for bad debt:
Debit Profit & loss account and (with the amount increased)
Credit Provision for bad debts account.
For a decrease in the provision for bad debt:
Debit Provision for bad debt account and
Credit Profit & loss account
The amount of decrease in the provision for bad debt is shown
as an income in the profit and loss account
While preparing the balance sheet, always the new
provision for bad debt is deducted from the amount of debtors.
Provision for discount
on debtors
This is the provision created to cover the expense of
discount that may be allowed to the debtors during the coming year when they
pay their debt on time. The increase in the provision for discount on debtors
is also shown as an expense in the profit & loss account and the new
provision for discount on debtors is deducted from the debtors in the balance
sheet.
The amount of provision for decrease in the provision for
discount on debtors is shown as an income in the profit & loss account.
The double entries
required for the provision for bad debt are:
During the first year to create the provision
for discount on debtors:
Profit
& loss account Dr
Provision
for discount on debtors account Cr
During the subsequent
years, for an increase in the
provision for discount on debtors:
Profit & loss account Dr.
Provisions for discount on debtors
account Cr.
For a decrease in the provision for discount on
debtors:
Provisions for discount on debtors
account Dr.
Profit & loss account Cr.
Key points
- A
debt written off is recorded in the books by debiting bad debts account
and crediting debtors account.
- The
provision for bad debt is calculated on the debtors’ balance obtained
after deducting the bad debt written off.
- In
the balance sheet, always the new provision for bad debt is deducted from
the Debtors.
- Increase
in the provision for bad debt is debited in the profit & loss account
and credited in the provision for bad debt account.
- Decrease
in the provision for bad debt is credited to profit & loss account and
debited in the provision for bad debt account.
- Increase
in the provision for bad debt is an expense and decrease in the provision
for bad debt is an income to be shown to in the profit & loss account.
- The
provision for discount on debtors is calculated on the debtors balance
after deducting the bad debt and the provision for bad debt amount.
- Always
new provision for discount on debtors is deducted from debtors, after
deducting the provision for bad debt.
- Increase
in the provision for discount on debtors is debited to profit & loss
account and credited to provision for discount on debtors account.
- Decrease
in the provision for bad debt is debited to provision for discount on
debtors account and credited to profit & loss account.
- Increase
in the provision for discount on debtors is an expense and decrease in the
provision for discount on debtors is an income to be shown in the profit
& loss account.