Bad/ Irrecoverable Debts

⚫ A debt which becomes uncollectable due to death ,

insolvency , bankruptcy or fraud by a debtor.
⚫ 1 Reduces the amount of receivables.
⚫ mean decrease in Assets
⚫ 2loss to the business
⚫ charged as an expense
⚫ will decrease the profit
⚫ ultimately capital will be decreased
⚫ Hence bad debts reduces both Assets and capital
Journal Entry
⚫ Irrecoverable Debts a/c 500
⚫ Receivables a/c 500
⚫ To close/transfer bad
debts(expenses)
⚫ I/S 500
⚫ Irrecoverable Debt a/c 500
Note:
⚫At the end of each accounting
year Expenses and Revenues
accounts are closed/transferred to
I/S
⚫Where as Assets and liabilities
accounts are balanced off
Bad/ Irrecoverable debts Account
Date Details Amount Date Details Amount
2018 $ 2018
April 1 Akmal 500 Dec 31 Income statement 2400
June 15 James 700
Aug 12 White 1200
2400 2400
2019
Recovery of bad debts
⚫ Intimation from debtor
⚫ Step 1
⚫ Accounts receivables 400
⚫ bad debts recovered 400
⚫ Step 2
⚫ Cash a/c 400
⚫ Accounts receivables 400

⚫ Immediate cash received from customer

Cash a/c
bad debts recovered a/c
bad debts Recovered Account
Date Details Amount Date Details Amount
2018 $ 2018
Dec 31 I /S 2500 April 1 Akmal 800
June 15 James 1200
Aug 12 White 500
2500 2500
2019
Income Statement extract
⚫ Gross Profit
⚫ Add other Income
⚫ Decrease in Provision for bad Debts
⚫ Bad debts recovered a/c
⚫ Profit on disposal
⚫ Discount received
⚫ Rent Received
⚫ Operating Expenses
⚫ Bad debts 959
⚫ Increase in Provision for Bad Debts 410
⚫ Depreciation on NCA
⚫ Loss On Disposal
Accounting Concepts
⚫ 1Prudence
⚫ Business anticipate losses but do not anticipate profits.
⚫ Business don’t overstate assets and under state liabilities.
⚫ 2Matching Principle/ Accrual Concepts
⚫ Charging expenses against the revenue of the same year
whether paid or not
⚫ Profit is the difference between revenue and expenses of
the same year
⚫ Matching the cost of using a NCA against its revenue
Provision for Bad Debts/Doubtful Debts
An Estimate for future bad debts based on past
experience.
Example
⚫ Year receivables PDD
⚫ Dec 2015 12000 5%
⚫ Dec 2016 14000 5%
⚫ Dec 2017 10000 5%
Journal Entries
⚫ Create /Increase in Provision for bad/doubtful
debts
⚫ Dr I/S 600
⚫ Cr Provision for bad debts 600
⚫ Dr I/S 100
⚫ Cr Provision for bad debts 100
⚫ Decrease in Provision for bad/doubtful debts
⚫ Dr Provision for bad debts 200
⚫ Cr I/S 200
Provision for bad debts a/c
Date Details Amount Date Details Amount
2015 $ 2015 $
Dec 31 Balance C/f step 2 600 Dec 31 I/S step 1 600
600 600
2016 2016
Dec 31 Balance c/f step 5 700 Jan Balance b/f step 3 600
Dec 31 I/S step 4 100
700 700
2017 2017
Dec 31 I/S step 7 200 Jan 1 Balance blf step 6 700
Balance c/f step 8 500
700 700
2018 jan Balance b/f step9 500
Statement of financial position Extracts

2015 2016 2017

Current Assets
Debtors/ trade receivables 12000 14000 10000
Less provision for bad debts (600) (700) (500)
11400 13300 9500
Example 2
⚫ Year Debtors PDD
⚫
⚫ Decmber 31 2018 15000 4%
⚫ 2019 20000 4%
⚫ 2020 14000 4%
June 2019 p22 q2
2018 2018
Dec 31 I/S 177 Jan 1 Balance b/f 1100
Dec 31 Balance c/f 923
1100 1100
2018
Jan 1 Balance b/f 923
Q 1 Bad /Irrecoverable Debts
2007 2007
May S Gill and 340 December I/S 959
Sons 31
September H Black 463
NOV A thom 156
959 959
Provision for doubtful debts
2007 2007
Dec 31 Balance c/f 410 Dec 31 I/S 410
410 410
2008
Jan 1 Balance b/f 410
Statement of financial position Extracts

2007
Current Assets
Debtors/ trade receivables 14420
Less provision for bad debts (410)
14010
Q2 Provision for doubtful debts
2008 2008
Jan 1 Balance b/f 320
Dec 31 Balance c/f 672 Dec 31 I/S 352
672 672
2009
Jan 1 Balance b/f 672
Q 2 Bad /Irrecoverable Debts
2008 2008
May Debtors 680 December I/S 680
31
September
NOV
680 680
Q 4 Provision for doubtful debts
2007 2007
Dec 31 Balance c/f 1640 Dec 31 I/S 1640
1640 1640
2008 Balance c/f 4560 2008
Dec 31 Jan 1 Balance b/f 1640
Dec I/S 2920
4560 4560
2009 I/S 160 2009
Dec 31 Jan 1 Balance b/f 4560
Balance c/f 4400
4560 4560
2010 4400
Jan 1 Balance b/f
Statement of financial position Extracts

2007 2008 2009

Current Assets
Debtors/ trade 41000 76000 88000
receivables
Less provision for bad (1640) (4560) (4400)
debts
39360 71440 83600
Q 4 Irrecoverable debts A/c
2007 2007
Dec 31 Receivables 1240 Dec 31 I/S 1240
2008
Receivables 2608 Dec 31 I/S 2608
2009