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Chapter 13 Notes (Part 2) - Provision For Doubtful Debts

Provision for doubtful debts

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RAJA RAHAIZAD RAJA ALI
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8 views

Chapter 13 Notes (Part 2) - Provision For Doubtful Debts

Provision for doubtful debts

Uploaded by

RAJA RAHAIZAD RAJA ALI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 13: BAD DEBTS

AND PROVISION FOR


DOUBTFUL DEBTS (PART 2)
Provision for Doubtful Debts
Learning Objectives
 To explain briefly the purpose of a provision for
doubtful debts.
 To record provision for doubtful debts correctly.
What is provision for doubtful debts ?

 An estimate of the amount of loss to the business


due to irrecoverable debts.
Why do we need to estimate ?
 Prudence concept – profit is not overstated. Trade
receivables in the statement of financial position to
be shown at a realistic level.
 Matching (Accruals) concept – debt which is
expected not to be repaid treated as an expense in
the year the sales are made rather than in the year
the debt is written off.
Difference between bad debt and
provision for doubtful debt
 A doubtful debt = not sure if the debt can be
repaid.
 An irrecoverable debt = the debt will not be
repaid (100% sure).

OR
Extract from Statement of Financial
Position
Provision for doubtful debts is always a contra in the statement
of financial position.
Extract from Statement of Financial
Position as at 31 December 20XX
Current Assets
Trade Receivables 10,000
Less: * Provision for doubtful debts 1,000
9,000
* Unlike irrecoverable debts, provision for doubtful debts must be
shown separately in the SOFP. This is because it is just an estimate
and will not be credited to the trade receivables account.
General rule - provision for
doubtful debts
An increase in provision
for doubtful debts
(increase in estimate) will
be an expense in the
income statement, while,

A reduction in provision
for doubtful debts
(decrease in estimate) will
be an income in the
income statement.
Creating provision for doubtful debts
Example 1

A business decided to make a provision for


doubtful debts at 10% of the trade receivables
which totalled $10,000 on 31 December 2011.
Provision for doubtful debts account
2011 $ 2011 $
Dec 31 Balance c/d 1,000 Dec 31 Income Statement 1,000
($10,000 x 10%) 2012
Jan 1 Balance b/d 1,000

Extract from the Income Statement for the year ended 31 December 2011
$ $
Gross profit X
Less: Expenses
Provision for doubtful debts 1,000

Extract from Statement of Financial Position as at 31 December 2011


Current Assets
Trade Receivables 10,000
Less: provision for doubtful debt 1,000
9,000
Increase in provision for doubtful debts
Example 2

On 31 December 2012, the trade receivables


totalled $15,000. The business maintained the
provision at 10% of its total receivables.
Provision for doubtful debts account
2011 2011 $
Dec 31 Balance c/d 1,000 Dec 31 Income Statement 1,000
($10,000 x 10%)
2012
2012
Dec 31 Balance c/d
Jan 1 Balance b/d 1,000
($15,000 x 10%) 1,500 Dec 31 Income Statement 500

1,500
1,500
2013
Jan 1 Balance b/d 1,500

Extract from Income Statement for the year ended 31 December


2011 2012
$ $ $ $
X
Gross profit X
Less: Expenses
Provision for doubtful debts 1,000 500
Extract from Statement of Financial Position as at 31 December
2011 2012
Current Assets $ $
Trade receivables 10,000 15,000
Less: provision for doubtful debts 1,000 1,500
9,000 13,500
Decrease in provision for doubtful debts
Example 3

The trade receivables accounts on 31 December


2013 totalled $7,500. The firm decided to
maintain the provision at 10% of the total
receivables.
Provision for doubtful debts account
2011 $ 2011 $
Dec 31 Balance c/d 1,000 Dec 31 Income Statement 1,000
($10,000 x 10%)
2012
2012
Dec 31 Balance c/d Jan 1 Balance b/d 1,000
($15,000 x 10%) 1,500
Dec 31 Income Statement 500

1,500 1,500

2013 $ 2013 $
Dec 31 Income Statement 750 Jan 1 Balance b/d 1,500
31 Balance c/d
($7,500 x 10%) 750

1,500 1,500
2014
Jan 1 Balance b/d 750
Extract from the Income Statement for the year ended 31 December
2011 2012 2013
$ $ $
Gross profit X X X
Add: Decrease in provision for doubtful debts 750
Less: Expenses
Increase in provision for doubtful debts 1,000 500

Extract from Statement of Financial Position as at 31 December


2011 2012 2013
Current Assets $ $ $
Trade receivables 10,000 15,000 7,500
Less: provision for doubtful debts 1,000 1,500 750
9,000 13,500 6,750
Reflection
 Write down the double entry for each of the following
adjustments:
Adjustments Account to Account to
be debited be credited
Creating provision for
doubtful debts for the first
time
Increase in provision for
doubtful debts
Decrease in provision for
doubtful debts

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