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Bad debt and provision for bad debt/ doubtful

debts
The amount of the Trader Receivables 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 Income
statement and deducted from the Trader Receivables.

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 Income statement by passing the following adjustment entry:

Debit Income statement

Credit Bad debt account
Bad Debts Account
31 Dec Trade receivable XXXX 31 Dec Income Statement XXXX

Income statement
DR CR
Bad Debts XXX

Trade recievable Account

31 Dec Sales 2000 31 Dec Bad debts 200
31 Dec Cash 1800
2000 2000

Provision for bad debt account or provision for doubtful debts account

The provision created to cover the next year’s bad debt expense out of the current year’s Trader
Receivables is known as provision for bad debts. This provision is created on the Trader
Receivables after deducting the current year’s bad debt.

The double entries required for creating the provision for bad debt are:

First year Debit income statement

Credit Provision for bad debts account.
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Provision for bad debts Account

31 Dec Bal c/d XXXX 31 Income Statement XXXX
2019 Dec2019
XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2020 2020
31 Dec Income statement increase XXX

XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2021 2021
31 Dec Income statement decrease XXX

XXXX XXXX

Income statement (Extract)

DR CR
Bad Debts XXX
Provision for bad debts (increase) XXX
Provision for bad debts (decrease) XXX
Second year and subsequent years:

For an increase in the provision for bad debt:

Debit income statement (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

Credit income statement (with the amount decrease)

The amount of decrease in the provision for bad debt is shown as an income in the Income
Statement
While preparing the Statement of financial position, always the new provision for bad debt is
deducted from the amount of Trade Receivables

Key points
 A debt written off is recorded in the books by debiting bad debts account and crediting
debtors / trade receivable account.
 The provision for bad debt is calculated on the debtors/ trade receivable’ 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 / trade receivable.
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 Increase in the provision for bad debt is debited in the income statement and credited in
the provision for bad debt account.
 Decrease in the provision for bad debt is credited to income statement 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 income statement.

Assignment questions

Q1 The following information is relating to the business of Saras for three years ended 31 st Dec 2017,
2018 and 2019:-
Year ended Bad debt to be Debtors at year end Provision for bad
31st Dec written off debt required at
each year end
2017 500 18 000 5%
2018 600 19000 5%
2019 400 21000 5%

Required to prepare for the three years ended 31 st Dec 2017, 2018 and 2019 :-

a. The bad debt account

b. The provision for bad debt account
c. The extracts from the income statement
d. The extracts from the statement of financial position

Workings notes:
Entry in
Allowance Allowance Entry in
Trade
Year Change Remarks
Receivable for for doubtful income
s doubtful debts statemen
$ debts$ at $ account t

Bad debts Account

XXXX XXXX
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Provision for bad debts Account

31 Dec Bal c/d XXXX 31 Income Statement XXXX
2019 Dec2019
XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2020 2020
31 Dec Income statement increase XXX

XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2021 2021
31 Dec Income statement decrease XXX

XXXX XXXX

Income statement (Extract)

DR CR
Bad Debts XXX
Provision for bad debts (increase) XXX
Provision for bad debts (decrease) XXX

Statement of financial position (Extract)

Current account: $ $ $
Trade Recievable

Q 2. The following details are available from the books of a business:-

Year Debtors at year Bad debt written off Provision for bad debt
ended end during the year required
2018 18000 228 5%
2019 22000 337 5%
2020 20000 250 5%

Required to prepare for the three years ended 31 st Dec 2018,2019 and 2020:-

a. The bad debt account

b. The provision for bad debt account
c. The extracts from the I/S
d. The extracts from the SFP
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Workings notes:
Entry in
Allowance Allowance Entry in
Trade
Year Change Remarks
Receivable for for doubtful income
s doubtful debts statemen
$ debts$ at $ account t

Bad debts Account

XXXX XXXX

Provision for bad debts Account

31 Dec Bal c/d XXXX 31 Income Statement XXXX
2019 Dec2019
XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2020 2020
31 Dec Income statement increase XXX

XXXX XXXX
31 Dec Bal c/d XXXX 1 Jan Bal b/d XXXX
2021 2021
31 Dec Income statement decrease XXX

XXXX XXXX

Income statement (Extract)

DR CR
Bad Debts XXX
Provision for bad debts (increase) XXX
Provision for bad debts (decrease) XXX
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Statement of financial position (Extract)

Current account:
Trade Recievable

3. Martin, a trader, decided to make allowance for doubtful debts at the rate of 2% of trade
receivables at the end of its financial year, that is 31 March each year. He made the first
allowance on 31 March 2019. Trade receivables has been as follows:

Year ending 31 March 2019 2020 2021 2022

Trade Receivables ($) 18 600 18 700 17 450 17 650

Required:
i. Calculate amount to be adjusted to profit each year.
ii. Allowance for doubtful debts account for the period 31 March 2009 to 1 April 2012.

4. The following information is available for Alpha, a trader, for the year ended 30 April 2012.

Trade receivable Allowance for Bad debts written Allowance for

at doubtful off doubtful
30 April debts at 1 May during the debtsoftotrade
2.5% be
$55 680 $1 313 $200 receivables

Required: Allowance for doubtful debts account.

5. The following information relates to the business of Isabelle:

Bad debts
Trade written off Bad debts to Provision
Year
Receivable during the be written for bad
2008 $12s 500 year
$300 off$100 debts
2%
2009 $16 400 $600 $50 3%
2010 $14 800 $400 - 2.5%
2011 $15 200 - $300 3%

Isabelle closes her accounts on 31 December each year. On 1 January 2008, the balance
on her provision for doubtful debts account was $210.
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Required:
Adjustment to Profit
New Entry in provision for
(Income
Year provision for doubtful debts
Statement) for provision
doubtful account
Dr Cr Dr Dr
2008 debts
2009
2010
2011

i. Complete the table below:

ii. Prepare balance sheet extract for each of the year 2008, 2009, 2010 and 2011
showing trade receivables and allowance for doubtful debts.