Lecture 11

Year End
Adjustments 3:

Bad Debts,
Doubtful Debts,
Bad Debts
Recovered
 RECOGNITION OF ACCOUNT RECEIVABLES

»Trade receivables, Accounts receivables or Trade debtors

˃ accounts arising from sale of goods and rendering of
services on a credit basis in the ordinary course of business
˃ classified as current assets in the Statement of Financial
Position
»Accounts receivables are recognized when revenue is
recognized in a credit sale transaction
 BAD DEBTS

 Amount of debt which cannot be collected after efforts have

been made to collect them
 Bad Debts is an expense for the current period
 Reasons for bad debts
◦ Debtor declared a bankrupt
◦ Debtor experiences financial difficulties
◦ Debtor cannot be traced
◦ Debtor dead
◦ Debtor unsound mind
 Allowance for Doubtful Debts

Allowance for Doubtful Debts is an estimated amount of

uncollectible debt made at the end of the financial year,
where specific bad debts cannot be determined.
 BAD DEBTS RECOVERED

– Debts that have been written off as bad debt previously

or in the prior accounting periods are recovered in the
current accounting year
– Bad Debts Recovered is an income and should be
shown in the Statement of Profit and Loss account
Working examples page 126 (Increase on doubtful debts):
Ameera Enterprise had a balance on its allowance for doubtful debts of
RM 26,250 as at 31 December 2020. Allowance for doubtful debts was estimated
at 5% on account receivable for the year ended 31 December 2021. On 31
December 2021, total of account receivable was RM 550,000. It was noticed that
RM 500 was uncollectable from Mr Suresh. Calculate the amount of allowance of
doubtful debts to be shown in the Statement of Profit or Loss for the year ended
31 December 2021 and show the Statement of Financial Position as at 31
December 2021
Last year Allowance of Doubtful Debts = 26,250 (2020)
Current year Allowance of Doubtful Debts = {(Accounts Receivable- Bad
Debts)*% of Allowance of Doubtful Debts}
= (550,000-500) * 5% = 27,475(2021)

Amount to be shown in Statement of Profit or Loss = 27,475-26,250 = 1,225

(increase)

Journal Entry: Statement of Profit or Loss for the year ended 31 December
2021
Debit Doubtful Debts 1,225 Gross Profit 34,900
Credit Allowance for Doubtful Debts 1,225
Add: Other Income 1,980

Less: Other Expenses

Doubtful Debts (Increase) 1,225
Last year Allowance of Doubtful Debts = 26,250
Current year Allowance of Doubtful Debts = {(Accounts Receivable- Bad
Debts)*% of Allowance of Doubtful Debts}
= (550,000-500) * 5% = 27,475

Amount to be shown in Statement of Profit or Loss = 27,475-26,250 = 1,225

(increase)
Statement of Financial Position as at 31 December 2021
Current Assets
Closing Inventory 1,980

Account Receivable
(550,000-500-27475) 522,025
 Working examples page 131(decrease on doubtful debts) :
Suria Enterprise had a balance on its allowance for doubtful debts of
RM 10,000 as at 31 December 2020. Allowance for doubtful debts was estimated
at RM 1,960 for the year ended 31 December 2020. On 31 December 2021, it
was noticed that RM 840 was proved to be bad and had been written off. Total
account receivable (after bad debts written off) was RM 27,600. It was decided to
provide for doubtful debts up to 5% of account receivable.

Calculate the amount of allowance of doubtful debts to be shown in the

Statement of Profit or Loss for the year ended 31 December 2021 and show the
Statement of Financial Position as at 31 December 2021
Last year Allowance of Doubtful Debts = 1,960 (2020)
Current year Allowance of Doubtful Debts = {(Accounts Receivable- Bad
Debts)*% of Allowance of Doubtful Debts}
= (27,600) * 5% = 1,380 (2021)

Amount to be shown in Statement of Profit or Loss = 1,960-1,380

=580 (decrease)
Statement of Profit or Loss for the year ended 31 December 2021
Journal Entry: Gross Profit 34,900

Debit Allowance for Doubtful Debts 580 Add: Other Income

Doubtful Debts (Decrease) 580
Credit Doubtful Debts 580
Last year Allowance of Doubtful Debts = 26,250
Current year Allowance of Doubtful Debts = {(Accounts Receivable- Bad
Debts)*% of Allowance of Doubtful Debts}
= (550,000-500) * 5% = 27,475

Amount to be shown in Statement of Profit or Loss = 27,475-26,250 = 1,225

(increase)
Statement of Financial Position as at 31 December 2021
Current Assets
Closing Inventory 1,980

Account Receivable
(27,600- 1,960) 25,640
Working example- bad debts recovered

On 31 August 2021, Maisarah, the daughter of Mr Mazlan paid RM 890 cash, on behalf of
his late father for his debts which was considered as a bad debts 10 years ago. The bank
balance as at 31 August 2021 (before bad debt recovered) was RM 11,350.

Show the effect in the Statement of Profit or Loss for the year ended 31 August 2021 and
show the Statement of Financial Position as at 31 August 2021
Journal Entry :

Debit Bank 890

Credit Bad Debt Recovered 890

Statement of Profit or Loss for the year ended 31 August 2021

Gross Profit 34,900

Add: Other Income

Bad Debts Recovered 890
Statement of Financial Position as at 31 August 2021

Current Assets
Closing Inventory 1,980

Bank
(11,350 + 890) 12,240