TOPIC 7

Bad Debts and

Provision for Doubtful Debts

1
 Learning Outcomes
• Explain the nature of bad debts, provisions and provision
for doubtful debts.
• Distinguish between specific provision and general
provision for doubtful debts.
• Prepare entries in the General Journal and Ledger for:
• Bad debts
• Bad debts recovered
• Provision for doubtful debts

• Calculate the correct amount of provision for doubtful

debts in the Profit and Loss account.
• Show Trade Debtors at expected collectable amount in
Statement of Financial Position.
2
 Introduction
Dr. Bank / Cash
Customers pay Cr. Debtor
Businesses sell on
CREDIT
Customers never pay Declare bad
debts in the year
that debt cannot
be collected
Bad debts

Charged to P&L as Remove Bad Debts

EXPENSE from current asset

Debit Bad debts Credit Debtors’ a/c

3
 Bad Debts
• Debts that are considered irrecoverable after all
efforts have been made to collect them.
• Bad debts are treated as a loss or an expense to a
business since it decreases the amount owed to the
business and is incurred in earning revenue, i.e. this
will have the effect of reducing the net profit in the
company.
• The possible reasons that give rise to bad debts are:

1. Debtor 2. Death of 3. Debtor is

becomes debtor nowhere to
bankrupt be found
4
 The Bad Debts Account
• Why is it needed?
• The bad debts account is necessary so that the
accounts show a “true” picture of the amount of
debts owed to the business.
Example 1:
•In the books of a sole trader:
•Mei You Qian owed RM400
•Nomoney owed RM500
•Notes sent to then but not available.
•Write off debts at the end of the accounting period
(31 December 2020)
5
 The Bad Debts Account
Double-Entry

To record bad debts:

Dr. Bad debts
Cr. Debtors

To close bad debts account:

Dr. Profit and loss
Cr. Bad debts
6
 The Bad Debts Account
Date Particulars Debit Credit
2020 RM RM
Dec 31 Bad debts 900
An expense, hence debit balance
Mei You Qian 400
Nomoney It decreases asset, hence credit 500
(Being debts written off as uncollectable)
Profit and loss 900
Bad debts represent EXPENSE 900
(Being closing off bad debts account to P&L)

Bad Debts a/c

2020 RM 2020 RM
Dec 31 Mei You Qian 400 Dec 31 P&L 900
Nomoney 500
900 900

Mei You Qian a/c

2020 RM 2020 RM
The amount Jan 1 Bal. b/d 400 Dec 31 Bad debts 400
that debtor
Debtors’
owe at Nomoney a/c account are
beginning
of the year
2020 RM 2020 RM closed
Jan 1 Bal. b/d 500 Dec 31 Bad debts 500 7
 Example 2:
Bad debts and trial balance
The following is an extract of a Trial Balance as at 30
June 2021:
Trial Balance as at 30 June 2021
Debit (RM) Credit (RM)
Debtors 11,000
Bad debts 600

Assuming that after the Trial Balance had been

prepared, it was decided that the account of RM400
for another debtor, Bees, was to be written off as
bad debts. Haven’t write off
(additional bad debts)

8
 Bad Debts Account and Trial Balance
Date Particulars Debit Credit
2021 RM RM
June 30 Bad debts 400
Bad debts INCREASE by RM400
Bees 400
(Being debts written off as uncollectable)
Profit and loss 1,000
Bad debts (600 + 400) 1,000
(Being closing off bad debts account to P&L)

Bad Debts a/c

Bad debts 2021 RM 2021 RM
INCREASE June 30 Balance 600 June 30 P&L 1,000
by RM400 Bees 400
1,000 1,000

Statement of Comprehensive Income for the year ended 30 June 2021

Bad debt will be under
Expenses RM
expenses in Statement of
Bad debts (600 + 400) 1,000 Comprehensive Income
Total bad
debts incurred
for the
Statement of Financial Position for the year ended 30 June 2021
accounting Debtor amount in Statement
period Current assets RM of Financial Position must after
Debtors (11,000 – 400) 10,600 deducting additional bad debt
Debtors DECREASE by RM400 9
 Bad Debts Recovered
• Bad debts recovered are previously
uncollectable debts that are unexpectedly
recovered.

• They are treated as other revenue of the

business.

• Where it should be credited in Statement of

Comprehensive Income?
• Under the heading of “Other Income”.

10
 Bad Debts Recovered
Double-Entry

To reinstate bad debts:

Dr. Debtors
Cr. Bad debts recovered

To record receipts of payment:

Dr. Cash / Bank
Cr. Debtors

To close bad debts recovered account:

Dr. Bad debts recovered
Cr. Profit and loss 11
 Therefore, no more balance in debtors a/c

To record receipts of payment:

Dr. Cash / Bank
Cr. Debtors
Therefore
To reinstate bad debts:
Dr. Debtors Dr. Cash / Bank
Cr. Bad debts recovered Cr. Profit and loss

To close bad debts recovered account:

Dr. Bad debts recovered
Cr. Profit and loss
12
 Bad Debts Recovered
1 January 2020: Balance brought down RM2,000.
1 April 2020: First payment was paid (cheque) by Frank totaled
RM300.
1 June 2020: Second payment was paid (cheque) by Frank
totaled RM500 and remaining amount owed was immediately
written-off as bad debt.
Debtor – Frank a/c
2020 RM 2020 RM
Jan 1 Bal. b/d 2,000 Apr 1 Bank 300
June 1 Bank 500
Bad debts 1,200 PAID
Dr. Bad Debts 1,200
Cr. Frank 1,200 NOT PAID » written-off as bad debts

1 October 2020: Frank settle the amount he previously owed

by cheque (BAD DEBTS RECOVERED)
13
 Bad debts recovered – method of recording
Date Particulars Debit Credit
2020 RM RM
Oct 1 Bank 1,200
Frank 1,200
(Being cheque received for bad debts recovered)
Frank 1,200
Bad debts recovered 1,200
(Being recovery of debts previously written-off as bad
debts)
Dec 31 Bad debts recovered 1,200
Profit and loss 1,200
(Being closing off to Profit and Loss account)

Debtor – Frank a/c

2020 RM 2020 RM
The debtor’s Jan 1 Bal. b/d 2,000 Apr 1 Bank 300
account is
closed off to June 1 Bank 500
the bad debts
Bad debts 1,200
recovered
account 2,000 2,000
Oct 1 Bad debts recovered 2 1,200 Oct 1 Bank 1 1,200
14
 Bad debts recovered – method of recording

Bad Debts Recovered a/c

2020 RM 2020 RM
Dec 31 Profit and loss 1,200 Oct 1 Frank 1,200
3 2

Statement of Comprehensive Income for the year ended 31 December 2020

Other income RM
Bad debts recovered 3 1,200
Expenses
Bad debts 1,200

15
 The Nature of a Provision
Dr. Bank / Cash
Customers pay Cr. Debtor
Businesses sell on
CREDIT Customers never pay Provision

To cover for the

future liability /
• Provision: To provide for FUTURE NEEDS loss (customers
cannot pay)
• A provision is the setting aside of income
Cannot be
to meet a highly probable known future determined
liability or loss, the amount and / or exactly

timing of which cannot be ascertained Estimate

exactly and is thus an estimate.
16
 Why provisions are needed?
• To charge as an expense in the profit and loss, an
amount representing debts that will probably never
be paid.

• To show in the SOFP a debtors figure as close as

possible to the true value of debtors at the SOFP
date.
Represent debts
that will probably Expense Profit and loss
never be paid

Debtors less Provision for Doubtful Debts

17
 Provision for Doubtful Debts
• Provision for doubtful debts is an estimation (usually
estimated as a percentage of the total debtors) of bad debts
that may become.
• E.g. 5% of total debtors

• It complies with the matching principle.

• It is consistent with the principle of prudence / conservatism.

Owe for long

Debts NOT paid Some debts will be bad,
but which ones?
at year end
Don’t owe for long

• Therefore, need to provide for the POSSIBILITY of bad debts

• If not, Debtors (SOFP) and Profit (SOCI) is OVERSTATED
18
 Two (2) types of provisions
It can consist of either or both of the following:

• A specific provision in respect of particular trade

debtors that have been identified as highly
unlikely to pay their debts.

• A general provision representing an estimate,

usually computed as a percentage, of the trade
debtors at the end of the accounting year who
are unlikely to pay their debts.
19
 Provision for Doubtful Debts
Double-Entry FORMULA:
additional

PDD = (Debtors – Bad Debts) x %

For new provision:

Dr. Profit and loss Note: Increase / decrease in
Cr. PDD (new provision amount) PDD is when there is a variation
between previous record with
the adjusted record
For increase in provision:
Dr. Profit and loss
Cr. PDD (increase amount only)

For decrease in provision:

Dr. PDD (decrease amount only)
Cr. Profit and loss 20
Creating (NEW) Provision for Doubtful Debts
Assuming at the end of the accounting year, when the Trial Balance
was drawn up on 31 December 2018 it showed the debtors totaling
RM20,000. The management decided that 5% of the total debtors
was to be created as provision for doubtful debts for the year ended
31 December 2018.
Journal Entry: To record Provision for Doubtful Debts
Date Particulars Debit Credit
2018 RM RM
Dec 31 Profit and loss 1,000
Provision for doubtful debts (20,000 x 5%) 1,000
(Being estimated provision for doubtful debts at
5% of the debtors)

Provision for Doubtful Debts a/c

2018 RM 2018 RM
Dec 31 Bal. c/d 1,000 Dec 31 P&L 1,000
21
 Creating (NEW) Provision for Doubtful Debts

Statement of Comprehensive Income for the year ended 31 December 2018

Expenses RM
Provision for doubtful debts 1,000

Statement of Financial Position as at 31 December 2018

Current assets RM
Debtors 20,000
(Less): Provision for doubtful debts 1,000
19,000

Shown as a deduction Current year provision

from the debtors

22
Increasing the Provision for Doubtful Debts
In the previous example, the credit balance of RM1,000 in the
Provision for Doubtful Debts Account will be carried forward to the
next accounting year 2019. Therefore, when Trial Balance is prepared
on 31 December 2019, before any adjustments, the amount will be
shown on the credit side in the Trial Balance.
EXAMPLE:
On 31 December 2019, the Trial Balance showed the following
information:

Trial Balance as at 31 December 2019

Debit (RM) Credit (RM)
Trade debtors 25,000
Provision for doubtful debts 1,000
Bad debts 1,200

23
Increasing the Provision for Doubtful Debts
Given Trial Balance as at 31 December 2019 (before adjusting):
Trade Debtors = RM25,000
PDD = RM1,000 (b/d from last year)
Bad Debts = RM1,200

Additional information:
• Management maintain provision for doubtful debts at 5% of Trade Debtors
• PDD (in 2019) = Trade debtors x 5%
= RM25,000 x 5%
= RM1,250
INCREASE of provision of RM250 from 2018 to 2019
• PDD (in 2018) = RM1,000
• Charged to Profit and Loss in 2019
Dr. Profit and Loss (expense increase)
CR. Provision for doubtful debts (increase)

24
 Increasing the Provision for Doubtful Debts
Journal entry: To record increase in Provision for Doubtful Debts
Date Particulars Debit Credit
2019 RM RM
Dec 31 Profit and loss 250
Provision for doubtful debts [(25,000 x 5%) – 1,000] 250
(Being increased provision for doubtful debts from
RM1,000 to RM1,250)

Provision for Doubtful Debts a/c Provision

2018 RM 2018 RM from
previous
Dec 31 Bal. c/d 1,000 Dec 31 P&L 1,000 year
2019 2019
Dec 31 Bal. c/d 1,250 Jan 1 Bal. b/d 1,000
Dec 31 P&L 250
Increase in
1,250 1,250 provision
Current year
provision

25
 Increasing the Provision for Doubtful Debts
Statement of Comprehensive Income for the year ended 31 December 2019
Expenses RM
Bad debts 1,200
Increase in provision for doubtful debts 250

Statement of Financial Position as at 31 December 2019

Current assets RM
Debtors 25,000
(Less): Provision for doubtful debts 1,250
23,750

Shown as a deduction Current year provision

from the debtors
26
 Alternative:
with doubtful debts expense account

Double-Entry

For new / increase in provision: Therefore

Dr. Doubtful debts expense
Cr. Provision for doubtful debts
Dr. Profit and loss
Cr. PDD
For closing entry:
Dr. Profit and loss
Cr. Doubtful debts expense

27
Decreasing the Provision for Doubtful Debts
Given Trial Balance as at 31 December 2020 (before adjusting):
Trade Debtors = RM23,000
PDD = RM1,250 (b/d from last year)
Bad Debts = RM1,100

Additional information:
• Management maintain provision for doubtful debts at 5% of Trade Debtors
• PDD (in 2020) = Trade debtors x 5%
= RM23,000 x 5%
= RM1,150
DECREASE of provision of RM100 from 2019 to 2020
• PDD (in 2019) = RM1,250
• Charged to Profit and Loss in 2020
Dr. Provision for doubtful debts (decrease)
CR. Profit and Loss (revenue increase)

28
 Decreasing the Provision for Doubtful Debts
Journal entry: To record increase in Provision for Doubtful Debts
Date Particulars Debit Credit
2020 RM RM
Dec 31 Provision for doubtful debts [(23,000 x 5%) – 1,250] 100
Profit and loss 100
(Being decreased provision for doubtful debts from RM1,250 to RM1,150)

Provision for Doubtful Debts a/c

2018 RM 2018 RM
Dec 31 Bal. c/d 1,000 Dec 31 P&L 1,000
2019 2019
Dec 31 Bal. c/d 1,250 Jan 1 Bal. b/d 1,000 Provision
from
Dec 31 P&L 250 previous
1,250 1,250 year

2020 2020
Dec 31 P&L 100 Jan 1 Bal. b/d 1,250
Decrease in
provision
Bal. c/d 1,150
1,250 1,250
Current year
29
provision
 Decreasing the Provision for Doubtful Debts
Statement of Comprehensive Income for the year ended 31 December 2020
Other income RM
Decrease in provision for doubtful debts 100
Expenses
Bad debts 1,100

Statement of Financial Position as at 31 December 2020

Current assets RM
Debtors 23,000
(Less): Provision for doubtful debts 1,150
21,850

Shown as a deduction Current year provision

from the debtors
30
 Alternative:
with doubtful debts expense account

Double-Entry

For decrease in provision: Therefore

Dr. Provision for doubtful debts
Cr. Doubtful debts expense
Dr. PDD
Cr. Profit and loss
For closing entry:
Dr. Doubtful debts expense
Cr. Profit and loss

31
 Practice 1
John sells goods on credit and has prepared the following information
for the last 3 years. His financial year ends on 31 May as follows:
2018 2019 2020

Customers’ balances at 31 May 140,000 148,000 132,000

Bad debts to be written off at 31 May 900 800 600

Provision for doubtful debts:

To be adjusted to % of net customers’ balance 2% 2.5% 2%

On 1 June 2017 the balance on the provision for doubtful account was
RM2,150.

Required:
Prepare for each of the 3 years, ledger accounts for
(a) Bad debts
(b) Provision for doubtful debts
32
 Solution 1

Bad Debts a/c

2018 RM 2018 RM
May 31 Debtors 900 May 31 P&L 900

2019 2019
May 31 Debtors 800 May 31 P&L 800

2020 2020
May 31 Debtors 600 May 31 P&L 600

Dr. Bad debts Dr. P&L

Cr. Debtors Cr. Bad debts

33
 Solution 1

Provision for Doubtful Debts a/c

2018 RM 2017 RM
May 31 Bal. c/d 2,782 June 1 Bal. b/d 2,150
2018
PDD = [(140,000 – 900) x 2%]
May 31 P&L 632
2,782 (2,150 – 2,782) 2,782
2019 2018
May 31 Bal. c/d 3,680 June 1 Bal. b/d 2,782
2019
PDD = [(148,000 – 800) x 2.5%] May 31 P&L 898
3,680 3,680
(2,782 – 3,680)
2020 2019
May 31 P&L 1,052 June 1 Bal. b/d 3,680
Bal. c/d 2,628
(3,680 – 2,628)
3,680 3,680
2020
PDD = [(132,000 – 600) x 2%] June 1 Bal. b/d 2,628

34
… End of Topic 7 …

Topic 8

35