CHAPTER 13

BAD DEBTS
AND
PROVISION
FOR
DOUBTFUL
DEBTS
Elizabeth Accounting Class
 1st topic BAD DEBTS
(IRRECOVERABLE DEBTS)
When somebody owes money but is unable to pay, the debt is a bad one. As soon as
debts are known to be bad, it should be write off.

Example 1:
Samuel is owed $1200 by Bill and $850 by Tony.
Both of these debtors have become bankrupt on 1 November 2010 and are unable to
pay their debts. Samuel writes the debts off as irrecoverable debts.

Journal entries:
Bad debts 2050
Bill 1200
Tony 850
 2nd topic
PROVISION FOR DOUBTFUL
DEBTS (PDD)
Although a debt may not actually have become irrecoverable, there may be
doubt as to whether it will be paid; it may turn out eventually to be a bad debt

Since it has not yet become bad, it would be WRONG to write it off.
A provision is made to cover that debts.

** If provision for doubtful debts increase 🡪 part of expense

If provision for doubtful debts decrease 🡪 part of other income
Example 2 :
The following information is extracted from Jonah’s accounts.
The owner creates a provision for doubtful debts started on 31 December 2008.

Trade Receivables Doubtful Debts (5%)

31-Dec-08 12,000 600 🡪 increase $600 (as part of expenses)
31-Dec-09 14,000 700🡪 increase $100 (as part of expenses)
31-Dec-10 10,000 500 🡪 decrease $200 (as part of other income)

Jonah had not previously made a provision for doubtful debts.

Journal entries :
31 Dec-08 I/S 600 if increase
PDD 600

31 Dec-09 I/S 100 if increase

PDD 100

31 Dec-10 PDD 200 if decrease

I/S 200
 Trade Receivables PDD
Net Trade Receivables

2008 12,000 (600) 11,400

2009 14,000 (700) 13,300
2010 10,000 (500) 9,500
A provision for doubtful debts complies with the following accounting concepts
PRUDENCE
🡪 Assets should not be overstated, profit should not be overstated
- Amounts expected to be received from trade receivables should not be overstated in
SOFP. The amount of Trade Receivables should be deducted with PDD.
- I/S should provide for the loss of the revenue and not overstate revenue.
MATCHING 🡪 Matching between revenue and
costs in the same period The possible loss of
revenue should be provided for the period in which
the revenue was earned, not in a later period when
the debt becomes bad.
Case
Jack is owed $250 by John, $450 by Jason, $1600 by Jillian, and $3500 by the other
debtors. Trade Receivables = $250 + $450 + $1600 + $3500 = $5800
John has become bankrupt on 1 November 2018 and are unable to pay his debts.
Jason has become bankrupt on 1 December 2018 and only able to pay his debts
$100. Jack writes the debts off as irrecoverable debts.
(a) Prepare the journal entries on 1 November and 1 December 2018

Journal entries (1 November 2018):

Bad debts 250
John 250

Journal entries (1 December 2018):

Bad debts 350
Bank 100

Jason 450
On 31 December 2018, Jack create a provision for doubtful debts 5% from
the remaining trade receivables.

(b) Calculate the amount of PDD at 31 December 2018 and

prepare the journal entries.

PDD = %PDD x (Trade Receivables – Bad debts)

= 5% x ($5,800 - $250 - $350)
= 5% x $5,100 = $260 🡪 increase by $260

I/S $260
PDD $260
(c) Prepare the extract statement of financial position

Statement of Financial Position (extract):

Trade Receivables PDD Net Trade Receivables
 31 Dec 2018 5,100 (not $5800) (260) 4840

** $5800 - $250 - $450 = $5100

Because $250 (John) and $350 (Jason) has been written off from the
trade receivables. And $100 (Jason) has been paid by Jason

Jillian and other debtors still owed to Jack = $1600 + $3500 = $5100
THANK YOU