Bad debts and Provision for

Bad debts
 Bad Debts
When the firm finds that it is impossible
to collect a debt, that debt should be
written off as a bad debt.
Accounting Entries:
Dr Bad Debts With the irrecoverable amount of a
Cr Debtor debt
 Example
During the year, a company sold goods
for $2,000 to Mr. Lee, $1,500 to Mr.
Wong and $300 to Mr. Wu.
Mr. Lee and Mr. Wong paid the company
$800 and $1,000 respectively
Later, Mr. Wong and Mr. Wu became
bankrupt, and it is impossible for the
company to collect these debts.
The company decided to write these off
as bad debts.
 Mr. Lee
$ $
Sales 2,000 Bank 800
Balance c/f 1,200
2,000 2,000
Mr. Wong
$ $
Sales 1,500 Bank 1,000
Bad Debts 500

1,500 1,500

Mr. Wu
$ $
Sales 300 Bad Debts 300

Bad Debts
$ $
Mr. Wong 500 P/L 800
Mr. Wu 300
800 800
B. Provision for Bad / Doubtful Debts

A provision for bad and doubtful debts

may be made when a firm thinks that
there will be problems in recovering a
debt.
Accounting entries

Increase in provision
1. Dr Profit and Loss With the increase in the amount of
2. Cr Provision for Bad provision for bad debts
Debts

Decrease in provision
2. Dr Provision for Bad With the decrease in the amount of
Debts provision for bad debts
3. Cr Profit and Loss
Increase in provision for bad debts
Example

A firm decided to make a provision for

bad debts at 10% of the debtors’
accounts which totalled $50,000 on 31
December 1994.
On 31 December 1995, the debtors
accounts totalled $60,000. The firm
maintained the provision at 10% of its
total debtors.
 Provision for Bad
1994 $ Debts
1994 $
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss 5,000
($50,000 * 10%)

Profit and Loss Account for the year ended 31 December (Extract)
1994
$ $
Gross profit
X
Less: Expenses
Increase in provision for bad debt 5,000

Balance Sheet as at 31 December (Extract)

1994
Current Assets
Debtors 50,000
5,000
Less: provision for bad debt
45,000
 Provision for Bad
1994 $ Debts
1994 $
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss 5,000
($50,000 * 10%)
1995 1995
Dec 31 Balance c/f Jan 1 Balance b/d 5,000
($60,000*10%) 6,000 Dec 31 Profit and Loss 1,000
6,000 6,000

Profit and Loss Account for the year ended 31 December (Extract)
1994 1995
$ $ $ $
Gross profit
X X
Less: Expenses
Increase in provision for bad debt 5,000 1,000
 Balance Sheet as at 31 December (Extract)
1994 1995
Current Assets
Debtors 50,000 60,000
5,000
Less: provision for bad debt 6,000
45,000 54,000
Decrease in Provision for bad debts
Example

The debtors’ accounts on 31 December

1996 totalled $40,000. The firm decided
to maintain the provision at 10% of the
total debtors.
 Provision for Bad
1994 $ Debts
1994 $
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss 5,000
($50,000 * 10%)
1995 1995
Dec 31 Balance c/f Jan 1 Balance b/d 5,000
($60,000*10%) 6,000 Dec 31 Profit and Loss 1,000
6,000 6,000

1996 $ 1996 $
Dec 31 Profit and Loss 2,000Jan 1 Bal b/f 6,000
31 Balance c/f
($40,000*10%) 4,000

6,000 6,000
 Profit and Loss Account for the year ended 31 December (Extract)
1994 1995 1996
$ $ $ $ $ $
Gross profit
X X X
Add: Decrease in provision for bad debts 2,
Less: Expenses
000
Increase in provision for bad debt 5,000 1,000

Balance Sheet as at 31 December (Extract)

1994 1995 1996
Current Assets
Debtors 50,000 60,000 40,000
5,000
Less: provision for bad debt 6,000 4,000
45,000 54,000 36,000
 C. Bad Debts Recovered
Bad debts recovered refers to debts
formerly written off to be recovered later.
Accounting
entries

Dr Debtors With the debt reinstated in the debtor’s

Cr Bad Debts Recovered account
Dr Cash/Bank With the amount received
Cr Debtors
Dr Bad Debts Recovered With the debt written off in this year to
Cr Bad Debts be recovered
OR OR
Dr Bad Debts Recovered With the debt written off in a previous
Cr Profit and Loss year to be recovered
 Example
The following balances were part of the trial
balance of Mr. Chan on 31 December 1996:
$
Debtors 10,000
Bad Debts 1,000
During the year, Mr. Chan received $300 and
$1,200 from debtors, whose debts had been
previously written off as bad debts in the
current year and last year respectively. No
entry has been made for these transactions
 Bank
1996 $
Dec 31 Debtors 1,
500 Debtors
1996 $ 1996 $
Dec 31 Bal b/d 10,000 Dec 31 Bank 1,500
Dec 31 B.D.R. 300
Dec 31 B.D.R. 1,200
Bad Debt
1996 $ 1996 $
Dec 31 Bal b/d 1,000 Dec 31 B.D.R. 300
Dec 31 P & L 700
1,000 1,000
Bad Debt Recovered
1996 $ 1996 $
Dec 31 Bad Debt 300 Dec 31 Debtors 300
Dec 31 P & L 1,200
Dec 31 Debtors 1,200
1,500 1,500
 Profit and Loss Account for the year ended 31 December (Extract)
1996
$ $
Gross profit X
Add: Bad Debt Recovered 1,
200
Less: Expenses
Bad Debt 700