Bad debts and provision for bad debt - Principles Of Accounting
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http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Bad debts and provision for bad debt The amount of the debtors which cannot be recovered is known as bad debt. At the end the accounting year, the amount of bad debt is shown as an expense in the profit & loss account and deducted from the debtors. The double entry for recording the bad debt is: Debit Bad debt account Credit Debtors account
At the end of the year, while preparing the final accounts, the bad debt account is transferred to the profit & loss account by passing the following adjustment entry:
Debit Profit & loss account Credit Bad debt account Provision for bad debt account or provision for doubtful debts account The provision created to cover the next year’s bad debt expense out of the current year’s debtors is known as provision for bad debts. This provision is created on the debtors after deducting the
/ http://www.principlesofaccounting2.com/ current year’s bad debt. The double entries required for creating the provision for bad debt are:
First year
Debit Profit & loss account and
Credit Provision for bad debts account.
Second year and subsequent years: For an increase in the provision for bad debt: Debit Profit & loss account and
(with the amount increased)
Credit Provision for bad debts account.
For a decrease in the provision for bad debt: Debit Provision for bad debt account and Credit Profit & loss account The amount of decrease in the provision for bad debt is shown as an income in the profit and loss account While preparing the balance sheet, always the new provision for bad debt is deducted from the amount of debtors. Provision for discount on debtors This is the provision created to cover the expense of discount that may be allowed to the debtors during the coming year when they pay their debt on time. The increase in the provision for discount on debtors is also shown as an expense in the profit & loss account and the new provision for discount on debtors is deducted from the debtors in the balance sheet. The amount of provision for decrease in the provision for discount on debtors is shown as an income in the profit & loss account. The double entries required for the provision for bad debt are:
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ During the first year to create the provision for discount on debtors:Profit & loss account
Dr.
Provision for discount on debtors account Cr.
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During the subsequent years, for an increase in the provision for discount on debtors:
Profit & loss account
Dr.
Provisions for discount on debtors account
Cr.
For a decrease in the provision for discount on debtors:
Provisions for discount on debtors account
Dr.
Profit & loss account
Cr.
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Key points
A debt written off is recorded in the books by debiting bad debts account and crediting debtors
account. The provision for bad debt is calculated on the debtors’ balance obtained after deducting the bad
debt written off. In the balance sheet, always the new provision for bad debt is deducted from the Debtors.
Increase in the provision for bad debt is debited in the profit & loss account and credited in the provision for bad debt account.
Decrease in the provision for bad debt is credited to profit & loss account and debited in the provision for bad debt account.
Increase in the provision for bad debt is an expense and decrease in the provision for bad debt is an income to be shown to in the profit & loss account.
The provision for discount on debtors is calculated on the debtors balance after deducting the bad debt and the provision for bad debt amount.
Always new provision for discount on debtors is deducted from debtors, after deducting the provision for bad debt.
Increase in the provision for discount on debtors is debited to profit & loss account and credited to provision for discount on debtors account.
Decrease in the provision for bad debt is debited to provision for discount on debtors account and credited to profit & loss account.
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Increase in the provision for discount on debtors is an expense and decrease in the provision for discount on debtors is an income to be shown in the profit & loss account.
MCQ
1. A debtor is unable to pay the amount owing to a business. The business decided to write off this amount. How this transaction is recorded? A. Debit debtor and credit bad debt C. Debit bad debt and credit debtor
B. Debit cash and credit debtor D. Debit provision for bad debt and credit debtor
2. A business decides to decrease its provision for bad debts from 7% to 5%.What will be the effect of this change? A. Increase the cash or bank balance
B. Decrease the cash or bank balance
C. Increase net profit for the year
3.
D. Decrease net profit for the year
What is the double entry to create a provision for bad debt?
A. Debit bad debts and credit provision for bad debts account B. Debit profit and loss account and credit provision for bad debts account C. Debit provision for bad debts account and credit profit and loss account D. Debit provision for bad debts account and credit bad debts account
4.
What is the treatment of provision for bad debts in the final accounts?
A. Debited in the profit and loss account only B. Debited in the profit and loss account and shown as current asset C. Debited in the profit and loss account and deducted from debtors D. Credited in the profit and loss account and added with debtors
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ 5.
What is the double entry to write off bad debt account?
A. Debit bad debt and credit debtors
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B. Debit profit and loss account and credit bad debts account C. Debit bad debts account and credit profit and loss account D. Debit profit and loss account and credit debtors account
6.
At the end of a financial year a business has debtors of $ 20 000 and a provision for bad debts of
$ 960. It is proposed to maintain provision for bad debts at 5%of debtors. What is the entry in the profit and loss account? A. Debit of $ 1000
B. Credit of $ 40
C. Debit of $ 40
D. Debit of $ 960
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ 7.
At the beginning of the year the provision for doubtful account shows balance of $ 1 500. It is
decided to write off a bad debt of $ 300 and to have a provision for doubtful debts $ 1 600. What will be effect on net profit at the end of the year? A. $ 100 increase
B. $ 400 decrease
C. $ 200 increase 8.
D. Unaffected
A business gives the following details for a year:-
Balance of provision for doubtful debt at the beginning $ 260 Bad debts written off during year $ 540 Total debtors at the end of the year $ 6 200 The provision for doubtful debts is to be made up to the rate of 5% on debtors at the end of the year. What amount on account of provision for doubtful debts will be transferred to profit and loss account at the end of the year? A. $ 310
9.
B. $ 260
C. $ 50
D. $ 510
A firm decided to increase the provision for doubtful debts by $ 150.What will be effect on net profit
/ http://www.principlesofaccounting2.com/ of this change?
A. Decrease by $ 150 10.
B. Increase by $ 150
C. Increase by $ 300
D. No effect
What is the double entry to write off bad debt from a debtors account?
A. Debit bad debts account and credit debtors account B. Debit debtors account and credit bad debts account C. Debit profit and loss account and credit bad debts account D. Debit bad debts account and credit profit and loss account Assignment questions Q1 The following information is relating to the business of Saras for three years ended 31st Dec 1997, 1998 and 1999:Year ended
Bad debt written Debtors at year end Provision for bad
31st Dec
off
debt required at each year end
1997 1998
500 600
18 000 19000
5% 5%
1999
400
21000
5%
Required to prepare for the three years ended 31st Dec 1997, 1998 and 1999 :a. The bad debt account
b. The provision for bad debt account
c. The extracts from the profit & loss account
d. The extracts from the balance sheet
Q 2.
The following details are available from the books of a business:-
YearendedDebtors at year
Bad debt written off
Provision for bad debt
2000
end 18000
during the year 228
required 5%
2001 2002
22000 20000
337 250
5% 5%
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Required to prepare for the three years ended 31st Dec 2000,2001 and 2002:-
a. The bad debt account
b. The provision for bad debt account
c. The extracts from the P&L A/C d. The extracts from the balance sheet
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Q 3. The following information is relevant to a business:-
Debtors on 31-12- 2000
$ 40 000
Bad debt written off during the year ended 31st Dec 2000 Provision for bad debt required at 31st Dec 2000
Debtors on 31-12-2001
$ 300
6% on year end debtors.
$ 45 000
Bad debt written off during the year ended 31st Dec 2001 $ 1 020 Provision for bad debt required at 31st Dec 2001
5%
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Debtors on 31-12-2002
$ 48 000
Bad debt written off during the year ended 31st Dec 2002 $ 900 Provision for bad debt required at 31st Dec 2002
7% st
Required to prepare for the three years ended 31
Dec 2000, 2001 and 2002:-
a. The bad debt account .
b. The provision for bad debt account.
c. The extracts from the P& L A/C
d. The extracts from the balance sheet.
Q 4. On 1st Jan 2000, there was a balance of $ 500 in the provision for bad debt account and it was decided to maintain the provision for bad debt at 5% of the debtors at each year end.
The debtors and bad debts written off at 31st Dec each year were:Debtors
Bad debt written off
2000
$ 11 000
2001
$ 7 000
$ 300
2002
$ 9 000
$ 400
$ 500
/ http://www.principlesofaccounting2.com/ Required to show the following for the three years ended 31st Dec 2000,2001 and 2002:-
a. The bad debts account
b. The provision for bad debt account.
c. The extracts from the P& L A/C
d. The extracts from the balance sheet.
Q 5. The following balances appeared in the books of business on 1st Jan 1999: The provision for bad debts account
$ 560
The provision for discount on debtors account
$ 120
Debtors on 1-1-2000
$ 22 000
Debtors on 31-12-2000
$ 20 000
Debtors on 31-12- 2001
$ 21 000
Provision for bad debts required each year end is at 5% on debtors. Provision for discount on debtors required each year end is at 2% on debtors. The bad debts written off during the three years were: 1999—–$ 450;
2000 ——$ 300;
2001 —–$ 550.
Required to prepare for the three years ended 31st Dec 1999, 2000 and 2001: a. The bad debts account.
b. The provision for bad debt account.
c. The provision for discount on debtors account. d. The extracts from the P& L A/C
e. The extracts from the balance sheet.
Q 6. R.Rosemary is a sole trader. She keeps a full set of accounts. The following are the details regarding her Debtors and Provision for bad debts for three years.
For the year ended Debtors at year end Bad debts written off during the year
31st Dec 1994 31st Dec 1995 31st Dec 1996 $ 30 400 $ 28 000 $ 29 000 $ 200 5%
$ 450 5%
$ 385 5%
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Provision for bad debts required at the end of each year
Required to prepare:
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1. The bad debts account 2. The provision for bad debts account 3. The extracts from the balance sheet Q 7. The following information is relating to the business of Martin for the three years ended 31st Dec 1997, 1998 and 1999:Years ended 31st Bad debts Dec written off at
Debtors at year end
year end
Provision for bad Provision for debt required each discount on debtors year end
required at year end
1997 1998
544 612
20 000 18 000
5% 5%
2% 2%
1999
815
19 000
5%
2%
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Required to prepare for the three years ended 31st Dec 1997,1998 and 1999:a. The bad debts account.
b. The provision for bad debt account.
c. The provision for discount on debtors account. d. The extracts from the P& L A/C Q 8.
e. The extracts from the balance sheet.
Following are the information regarding bad debts and provision for bad debts and provision for
discount on debtors for the three years ending 31st Dec.1991, 1992,&1993.
For the year ended Bad debts written off Debtors at year end
31st Dec1991 $450
31st Dec 1992 $ 300
31st Dec1993 $ 250
$ 2 8000 10%
$ 26 000 10%
$ 30 000 10%
5%
5%
5%
Provision for bad debts required at the year end Provision for discount on debtors required at the year end.
Required to prepare 1. The bad debts A/C for the three years
/ http://www.principlesofaccounting2.com/ 2. The provision for bad debts A/C for three years 3. The provision for discount on debtors A/C for three years 4. The extracts from the Balance Sheet for three years.
Q 9. David marks is a sole trader. He keeps his accounts under double entry system. The following information is relating to his business debtors, provision for bad debts and provision for discount on debtors for three years ending 31st December 1997,1998,1999:Balance in the provision for bad debts A/C on 1-1-1997
$ 1 000
Balance in the provision for discount on debtors A/C on 1-1-1997 Debtors on 31stDec.1997
$ 200
$ 11 000
Provision for bad debts required on 31st Dec 1997
10%
Provision for discount on debtors required on 31-12-1997
2%
Debtors on 31st Dec.1998
$ 10 000
Provision for bad debts required on 31st dec.1998
9%
Provision for discount on debtors required on 31st Dec 1998 Debtors on 31st Dec 1999
2% $ 12 000
Provision for bad debts required on 31st Dec 1999 st
Provision for discount on debtors required on 31
10% Dec 1999
3%
Required to prepare for three years ending 31st Dec 1997, 98 &99 1. The provision for bad debts A/C. 2. The provision for discount on debtors A/C. 3. The extracts from the balance sheets.
Q 10.
Lee’s balance sheet at 31st March 1997 included the following entry as part of the list of
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Current assets: Debtors
Less Provision for bad debts
12 000
360
11 640
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At the end of each of the two financial years, the amounts of debtors before deducting any provisions for bad debts were:31st March 1998 15 000
Debtors
31st March 1999 9 000
On each of these dates a provision for bad debts was calculated on the same percentage basis as at 31st March 1997.
The actual amounts of bad debts written off during each year were:
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ 1998
760
1999
235
(a) Prepare the bad debts accounts and the provision for bad debts accounts for the years ended 31st March 1998 and 1999. (b) Show, under appropriate heading, how debtors and provision for bad debts would appear in the balance sheet at 31st March 1998 and 1999. (c) Explain why it is important to make the allowance for provision for bad debts in preparing the final accounts. Q 11.
Albert is a wholesaler who maintains separate bad debt and provision for bad debt accounts for
his business. During the year ended 31st Dec 1999, he created 5% of the debtors as provision for bad debt and 2% as the provision for discount on debtors. The balance in the provision for bad debt account and the provision for discount on debtors accounts on 31st Dec 1999 were $ 1 200 and $ 456 respectively. During the year ended 31st Dec 2000, the amount of debtors before writing off the bad debt of that year was $ 26 000. The bad debt account on that date showed a total of $ 1 000. During the year ended 31st Dec 2000, Albert decided to revise the percentage of the provision for bad debt at 6% on year end debtors and to create the provision for discount on debtors at the same percentage as last year.
Required to prepare at 31st Dec 2000:-
/ http://www.principlesofaccounting2.com/ a. The bad debt account.
b. The provision for bad debt account
c. The provision for discount on debtors account.
Q 12.
Gilbert is the owner of a business. The following information is available from the books of his
business at 31st Dec 1997:Debtors
$ 20 000
Less provision for bad debts
$ st
For the years ending 31
1 000
$ 19 000
Dec 1998 and 31st 1999,the amount of debtors before deducting bad
debts and provision for bad debts were:31st Dec 1998
$ 18 200
31st Dec 1999
$ 19 300
On each of these dates a provision for bad debts was calculated on the same percentages basis at 31st Dec 1997. The actual amount of bad debts was:31st Dec 1998
$ 200
31st Dec 1999
$ 300
Prepare for the years ended 31st Dec 1998 and 1999:1. The Bad debts A/C 2. The provision for bad debts A/C 3. The relevant extracts from the Balance Sheet. Incoming search terms:
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provision for bad debts provision for bad debt provision for doubtful debts entry provision t account Provision for doubtful debt maintain at provision for bad debts in manufacturing provision for bad debts in balance sheet provision for bad debts and credit creation in first bank provision for bad debt expense provisions for bad debt
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