RECORDING OF PROVISION FOR BAD DEBTS

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Financial Accounting (Mgt-101)

Lesson-25

RECORDING OF PROVISION FOR BAD DEBTS

Debit:

Provision for Bad Debts (P&L)

Credit:

Provision for Bad Debts

The debit account is charged against current years profit and the credit head is shown as a deduction from

debtors in the balance sheet.

PRESENTATION OF PROVISION FOR BAD DEBTS

Extract of P&L to show the Provision

Profit and Loss Account for the year ended June 30, 20--

Gross Profit

xxxxx

Less: Admin Expenses

Provision for bad debts

(5,000)

Extract of Balance Sheet to show the Provision

Current Assets

Debtors

100,000

Provision for Bad Debts

(5,000)

95,000

BAD DEBTS & PROVISION FOR BAD DEBTS

When the bad debt for which provision is already made is confirmed, following entry is passed:

Debit:

Provision for Bad Debts

Credit:

Debtors

As expense has already been charged, therefore, no affect is given to P&L at this point.

Reducing the provision

Debit:

Provision for Bad Debts (Balance Sheet)

Credit:

Provision for Bad Debts (P&L)

Increasing the provision

Debit:

Provision for Bad Debts (P&L)

Credit:

Provision for bad debts

166

Financial Accounting (Mgt-101)

EXAMPLE # 1

Following information is available for A Ltd. For the year ended June 30, 2002.

· Bad Debts During the year

November

1,100

January

640

April

120

· At the year end total debtors amounted to Rs. 68,000 out which Rs. 2,200 is considered to be

doubtful / bad.

Show the relevant accounts and extracts from Profit and Loss and Balance Sheet.

SOLUTION

A Ltd.

Bad Debts Account

Account Code --

Date

Vr. Narration /

Ledger DR.

CR.

Balance

2002

# Particulars

Code

Amount Amount Dr/(Cr)

Nov 01

Bad Debts

1,100

Jan

Bad Debts

640

1,740

Apr

Bad Debts

120

1,860

June 30

Transfer to P&L

1,860

A Ltd.Provision for Bad and Doubtful Debts(P & L)Account Code --

Date

Vr. Narration /

Ledger DR.

CR.

Balance

2002

# Particulars

Code Amount

Amount Dr/(Cr)

Jun 30

Provision for the Year

2,200

Jun 30

Transfer to P&L

2,200

A Ltd. Provision for Bad and Doubtful Debts (B/S)

Account Code --

Date

Vr. Narration /

Ledger DR.

CR.

Balance

2002

# Particulars

Code Amount

Amount Dr/(Cr)

Jun 30

Provision for the Year

2,200

(2,200)

PRESENTATION

A Ltd.

Profit and Loss Account for the year ended June 30, 2002

Gross Profit

-------

Less: Expenses

Bad Debts

(1,860)

Provision for bad debts

(2,200)

167

Financial Accounting (Mgt-101)

Extract of Balance Sheet As On June 30, 2002.

Current Assets

Debtors

68,000

Provision for Bad Debts

(2,200) 65,800

EXAMPLE # 2

A business creates a provision for bad debts @ 5% of its debtors on balance sheet date.

· On Jan 01, 2002 the balance of Provision was 6,600.

· During the year debts written off amounted to Rs. 5,400.

· On December 31, 2002, debtors totaled Rs. 62,000.

· Show Bad debts Account and provision for bad debts account.

SOLUTION

Required closing balance of Provision

62000 x 5% = 3,100

Provision for Bad and Doubtful Debts Account (B/S)

Account Code --

Date

Vr. Narration /

Ledger DR.

CR.

Balance

2002

# Particulars

Code Amount

Amount Dr/(Cr)

Jan 01

Opening Balance

6,600

(6,600)

Bad Debts

5,400

(1,200)

Dec 31

Provision for bad debts

1,900

(3,100)

PRESENTATION

Extract of Balance Sheet

Current Assets

Debtors

62,000

Provision for Bad Debts

(3,100) 58,900

CONTROL ACCOUNTS

We have studied about Purchases, Sales, Debtors and Creditors in our previous lectures. We have also

studied that trial balance works as a check of mathematical accuracy of the book keeping. If the trial balance

is not balanced, then it indicates an error in recording of transactions. To detect this error one has to go

through all the transactions during the year to detect the error. Now, if the size of the business is small, it

would be easier to detect the difference. But if the business is large, then it becomes difficult to detect the

difference. To solve this problem, a system of checks is devised so that the ledger accounts are distributed in

smaller groups and a trial is prepared for every group.

Usually with the growth of business, the number of suppliers (creditors) and customers (debtors) grow. So, if

we open a separate ledger account for every creditor and debtor, then the general ledger and trial balance

would become too voluminous to manage. Therefore, in order to simplify things, one ledger each is

maintained for Debtors and Creditors. The Debtors Ledger is called Total Debtors Ledger or Sales Ledger

Control Account (as Credit sales are recorded in this account). The Creditors Ledger is called Total

Creditors Ledger or Purchase Ledger Control Account (as Credit purchases are recorded in this ledger).

In General Ledger one account is kept for all the Debtors, called Debtors Control Account, and one for

Creditors, called Creditors Control Account.

168

Financial Accounting (Mgt-101)

The principle on which control accounts are based is simple and is as follows:

· If the opening balance of an account is known, together with the total of deductions and additions

entered in the account, the closing balance can be calculated.

· The same method is applied to the whole ledger, the total of opening balances together with the

additions and deductions during the period should give the total of closing balances.

· Therefore, individual creditor's and debtor's accounts are opened in the total creditors' ledger and

total debtors ledger and their summarized figures are posted in the respective Control Accounts in

the General Ledger.

The principle described above can be illustrated as follows:

Take the example of Total Debtors Account:

· Total of Opening Balances Dr.

Rs.

200,000

· Add. Total of Debit entries

Rs.

650,000

850,000

Less Total of Credit entries

Rs.

(300,000)

650,000

The balance of Debtors control account in the general ledger should be Rs. 650,000. If this is not so, then

there is an error in the procedure of recording, which should be traced out.

INFORMATION FOR CONTROL ACCOUNTS DEBTORS

In the above illustration, we used some information. Now we will study the sources from which the

information is obtained.

Type

of Source of Information

Information

Opening balance List of debtors balances drawn up to the end of previous period.

of debtors

Credit Sales

A separate book is maintained to record individual transactions.

Totals are drawn from this book

Sales Return

A separate book is maintained to record individual transactions.

Totals are drawn from this book

Cheques/Cash

List of receipts is extracted from cash and bank book.

Received

Closing Balance

This is the balancing figure that can also be checked from the list of

individual balance of debtors.

169

Financial Accounting (Mgt-101)

Consider the following data:

Sales Journal

Date

Invoice #

Name

Amount

Jan,

20--

10,000

Jan,

20--

12,500

Jan,

20--

15,000

Total

37,500

Total of sales journal will be recorded in the Debtors Control Account through the following entry:

Debit:

Debtors Control Account

37,500

Credit:

Sales Account

37,500

Note that cash sales are not included in this whole process. They are directly recorded in the

general ledger.

INFORMATION FOR CONTROL ACCOUNTS CREDITORS

The information flow in case of creditors is similar to debtors, which is listed here:

Opening balance of List of creditors balances drawn up to the end of previous period.

debtors

Credit Purchases

A separate book is (purchase journal) is maintained to record

individual transaction. Totals are drawn from this book

Purchase Return

A separate book is (purchase return journal) is maintained to record

individual transaction. Totals are drawn from this book

Cheques/Cash Paid List of payments is extracted from cash and bank book. Or a separate

column is maintained in cash and bank books for this purpose.

Closing Balance

This is the balancing figure that can also be checked from the list of

individual balance of debtors.

170

Financial Accounting (Mgt-101)

Consider the following data:

Purchase Journal

Date

Invoice #

Name

Amount

Jan,

20--

5,500

Jan,

20--

9,000

Jan,

20--

8,500

Total

23,000

Total of purchase journal will be recorded in the Creditors Control Account through the following entry:

Debit:

Purchases Account

23,500

Credit:

Creditors Control Account

23,500

Note that cash purchases are not included in this whole process. They are directly recorded in the

general ledger.

EXAMPLE # 1

Prepare a Creditors Control Account from the following data and work out the closing balance on April 30,

of creditors.

Apr. 1

Opening Balance

44,500

Totals for May:

Total Credit Purchases

32,000

Purchase Return

6,200

Cheques and Cash paid

28,800

Discounts received

2,500

SOLUTION

Creditors Control Account

Account Code --

Debit Side

Credit Side

Date

No. Narration

Dr. Rs.

Date

No. Narration

Cr. Rs.

April 30

Purchase return

6,200 April 01

Balance B/F

44,500

April 30

Payments

28,800 April 30

Total Purchases

`32,000

April 30

Discounts

2,500

received

Balance C/F

39,000

Total

76,500

Total

76,500

EXAMPLE # 2

Prepare a Debtors control Account from the following data and work out the closing balance on May 31, of

debtors.

171

Financial Accounting (Mgt-101)

May 1 Opening Balance

70,000

Totals for May

Total Credit Sales (Sales Journal)

26,000

Returns Inward (Sales Inward Journal)

3,400

Cheques and Cash received

46,000

Discounts allowed

3,700

SOLUTION

Debtors Control Account

Account Code --

Debit Side

Credit Side

Date

No.

Narration

Dr. Rs.

Date

No.

Narration

Cr. Rs.

May1

Bal B/F

70,000 May31

Returns

3,400

May31

Total sales

26,000 May31

Receipts

46,000

May31

Discounts

3,700

May31

Bal C/F

42,900

Total

96,000

Total

96,000

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