Dealing with Bad

Debts
 Accounting for
Bad Debts

Accurate Estimation Low Accuracy

Direct Method
Reactive
Method Proactive

% of Receivables % of Sales
Method Method
Direct Method
• Account for bad debts when they actually occur.
2022 Accounts Receivable Dr 1,00,000
2022 Sales Cr 1,00,000

2023 Bad Debts Expense Dr 1,000

Actual Incidence
2023 Accounts Receivable Cr 1,000
of Bad Debt
Estimation Method
• Estimate the bad debt and make suitable provisions.
Journal Entries
2022 Accounts Receivable Dr 1,00,000
2022 Sales Cr 1,00,000

2022 Bad Debts Expense Dr 1,000

2022 Allowance for Bad Debts Cr 1,000

2023 Allowance for Bad Debts Dr 1,000

Actual Incidence
2023 Accounts Receivable Cr 1,000 of Bad Debt
% of Sales vs % of Receivables
Movement in Allowance for Bad Debts

Opening Allowance for Bad Debts 10,000

Less: Bad Debts written off - 7,000
Add: Additional allowance created during the period +5,000 Estimated using % of sales

Closing Allowance for Bad Debts 8,000 Estimated using % of

receivables
When the estimate is correct
• Actual Bad Debts written off are equal to the estimate
Allowance made 5,000
Bad Debts written off 5,000

Journal Entry
1) Allowance for Bad Debts Dr 5,000
Accounts Receivable Cr 5,000
When the estimate is
wrong
• Case I: Actual Bad Debts written off are more than the estimate
Allowance made 5,000
Bad Debts written off 7,000

Journal Entry
1) Allowance for Bad Debts Dr 5,000
Accounts Receivable Cr 5,000
2) Bad Debts Expense Dr 2,000
Accounts Receivable Cr 2,000
• Case II: Actual Bad Debts written off are less than the estimate
Allowance made 5,000
Bad Debts written off 3,000

Journal Entry

1) Allowance for Bad Debts Dr 3,000

Accounts Receivable Cr 3,000
2) Allowance for Bad Debts Dr 2,000
  Other Income/Bad Debt Allowance Written Back Cr 2,000
  Pass this entry only if you are sure that there will be no more bad debts
120,000 x 2% = 2,400
90,000 x 4% = 3,600
10,000 x 10% = 1,000
7,000
Movement
Opening Allowance for Bad Debts 6,000
- Bad Debts written off -4,000
+ Allowance made during the year +X
= Closing Allowance for Bad Debts 7,000

X = 5,000
 Allowance made during the year
=200,000 x 2% = 4,000

Movement
Opening Allowance for Bad Debts 6,000
- Bad Debts written off - 4,000
+ Allowance made during the year + 4,000
= Closing Allowance for Bad Debts 6,000