1. Bad debts and Provision for Bad debts

2. With the irrecoverable amount of a
Bad Debts
When the firm finds that it is impossible to collect a debt, that debt should be written off as a bad debt.
Accounting Entries:
Dr Bad Debts
Cr Debtor
With the irrecoverable amount of a
debt

3. Example
During the year, a company sold goods for $2,000 to Mr. Lee, $1,500 to Mr.Wong and $300 to Mr. Wu.
Mr. Lee and Mr. Wong paid the company $800 and $1,000 respectively
Later, Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts.
The company decided to write these off as bad debts.

4. Mr. Lee $ $ Balance c/f 1,200 Sales 2,000 Bank 800 2,000 2,000
Mr. Wong $ $
Bad Debts
Bank ,000
Sales ,500
1,500
1,500
Mr. Wu $ $
Sales
Bad Debts
Bad Debts $ $
P/L
Mr. Wong
Mr. Wu
800
800

5. B. Provision for Bad / Doubtful Debts
A provision for bad and doubtful debts may be made when a firm thinks that there will be problems in recovering a debt.

6. Accounting entries Increase in provision
Dr Profit and Loss
Cr Provision for Bad Debts
With the increase in the amount of provision for bad debts
Decrease in provision
Dr Provision for Bad Debts
Cr Profit and Loss
With the decrease in the amount of provision for bad debts

7. Increase in provision for bad debts Example
A firm decided to make a provision for bad debts at 10% of the debtors’ accounts which totalled $50,000 on 31 December 1994.
On 31 December 1995, the debtors accounts totalled $60,000. The firm maintained the provision at 10% of its total debtors.

8. Provision for Bad Debts$ $
Dec 31 Balance c/d ,000
($50,000 * 10%)
Dec 31 Profit and loss ,000
Profit and Loss Account for the year ended 31 December (Extract)
1994 $ $
Gross profit X
Less: Expenses
Increase in provision for bad debt 5,000
Balance Sheet as at 31 December (Extract)
1994
Current Assets
50,000
Debtors
Less: provision for bad debt
5,000
45,000

9. Profit and Loss Account for the year ended 31 December (Extract)
Provision for Bad Debts $ $
Dec 31 Balance c/d ,000
($50,000 * 10%)
Dec 31 Profit and loss ,000
1995
1995
Dec 31 Balance c/f
($60,000*10%) ,000
Jan Balance b/d ,000
Dec 31 Profit and Loss ,000
6,000
6,000
Profit and Loss Account for the year ended 31 December (Extract)
1994
1995 $ $ $ $
Gross profit X X
Less: Expenses
1,000
Increase in provision for bad debt 5,000

10. Balance Sheet as at 31 December (Extract)
1994
1995
Current Assets
50,000
60,000
Debtors
Less: provision for bad debt
6,000
5,000
45,000
54,000

11. Decrease in Provision for bad debts Example
The debtors’ accounts on 31 December 1996 totalled $40,000. The firm decided to maintain the provision at 10% of the total debtors.

12. Provision for Bad Debts$ $
Dec 31 Balance c/d ,000
($50,000 * 10%)
Dec 31 Profit and loss ,000
1995
1995
Dec 31 Balance c/f
($60,000*10%) ,000
Jan Balance b/d ,000
Dec 31 Profit and Loss ,000
6,000
6,000 $ $
Jan 1 Bal b/f ,000
Dec 31 Profit and Loss ,000
Balance c/f
($40,000*10%) ,000
6,000
6,000

13. Add: Decrease in provision for bad debts 2,000
Profit and Loss Account for the year ended 31 December (Extract)
1994
1995
1996 $ $ $ $ $ $
Gross profit X X X
Add: Decrease in provision for bad debts ,000
Less: Expenses
1,000
Increase in provision for bad debt 5,000
Balance Sheet as at 31 December (Extract)
1994
1995
1996
Current Assets
50,000
60,000
40,000
Debtors
Less: provision for bad debt
6,000
4,000
5,000
45,000
54,000
36,000

14. C. Bad Debts Recovered
Bad debts recovered refers to debts formerly written off to be recovered later.

15. Accounting entries Dr Debtors Cr Bad Debts Recovered
With the debt reinstated in the debtor’s account
Dr Cash/Bank
Cr Debtors
With the amount received
Dr Bad Debts Recovered
Cr Bad Debts OR
Cr Profit and Loss
With the debt written off in this year to be recovered
With the debt written off in a previous year to be recovered

16. Example
The following balances were part of the trial balance of Mr. Chan on 31 December 1996: $
Debtors ,000
Bad Debts ,000
During the year, Mr. Chan received $300 and $1,200 from debtors, whose debts had been previously written off as bad debts in the current year and last year respectively. No entry has been made for these transactions

17. Bank Debtors Bad Debt Dec 31 Debtors 1,500 Dec 31 Bal b/d 10,000$
Dec 31 Debtors ,500
Debtors $ $
Dec 31 Bal b/d ,000
Dec 31 Bank ,500
Dec 31 B.D.R
Dec 31 B.D.R ,200
Bad Debt $ $
Dec 31 B.D.R
Dec 31 Bal b/d ,000
Dec 31 P & L
1, ,000
Bad Debt Recovered $ $
Dec 31 Bad Debt
Dec 31 Debtors
Dec 31 P & L ,200
Dec 31 Debtors ,200
1, ,500

18. Profit and Loss Account for the year ended 31 December (Extract)
1996 $ $
Gross profit X
Add: Bad Debt Recovered ,200
Less: Expenses
Bad Debt