“In the Name of Allah, the Most Beneficent,

the Most Merciful”

Bad Debts & Provision of
Bad Debts
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Bad Debts

• Credit sales
• Accounts Receivable
• Expense
• Profit and loss statement
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Bad Debts

• Account Receivable Dr
Sales / Revenue Cr
• Bad Debts Dr
Account Receivable Cr
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Activity 1

• What circumstances might lead you to write off a debt as bad debt
and not close the debtor’s account?
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Activity 1

• If one of the following occurs:

1. The debtor may be refusing to pay one of a number of invoices
2. The debtor may be refusing part of an invoice
3. The debtor may owe payments on a number of invoices and have indicated that
only a proportion of the total amount due will be paid because the debtor’s
business has failed
4. The debtor’s business has failed and nothing is ever likely to be received
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Activity 1

• Account Receivable Dr
Sales / Revenue Cr
• Bad Debts Dr
Account Receivable Cr
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Allowance for Doubtful Debts

• To charge as an expense representing bad debts that will never be

paid
• To balance the accounts receivable head in the financial statement
Disclosure for Doubtful Debts
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Estimating Bad Debt Expense

• Income Statement Approach (% sales method)

• Balance Sheet Approach (Account receivable aging method)
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Estimating Bad Debt Expense
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Joint Expenditure

Machinery Statement of the

$1000 Capital account financial
(General ledger) position
$1500
Repairs account Income
$500 Revenue
(General ledger) statement
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Activity 2

• A builder was engaged to tackle some work on your premises, the total bill
being for $3,000. if one third of this was for repair work and two third for
improvements, where should the two parts be entered in the accounting books
and where would they appear in the financial statements?
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Incorrect treatment of expenditure

• If one of the following occurs:

1. Capital expenditure is incorrectly treated as revenue expenditure
2. Revenue expenditure is incorrectly treated as capital expenditure
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Activity 3

• Can you think of an example where an item may have been treated as
revenue expenditure and charged in the trading account when it
should have an been treated as capital expenditure?
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Treatment of loan expense
• If money is borrowed to finance the purchase of a non current asset,
interest will have to be paid on the loan. The interest amount will be
treated as acquisition cost of acquiring an asset.

• IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the

acquisition, construction or production of a 'qualifying asset' (one that necessarily
takes a substantial period of time to get ready for its intended use or sale) are
included in the cost of the asset. Other borrowing costs are recognized as an expense.
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Activity 4

• Why shouldn't the interest on the funds borrowed to finance

acquisition of a non current asset be included in its cost?
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Capital & Revenue Receipts
• When an item of capital expenditure is sold, the receipt is called a
capital receipt.

• Revenue receipts are sales and other revenue items that are added to
gross profit, such as rent receivable and commission receivable.