FRA Exam - December 2007 - Provision for Doubtful Debts

Maria

Hi there

I wonder if anyone can help me on this as I have been racking my brains for ages!

When you create a provision for doubtful debts for the first time of say 5% of £12900 i.e. £645 how would this be posted in the trial balance? Would you credit provision for doubtful debts of £645 ONLY or would you also debit provision for doubtful debts adjustment account and would you adjust the debtors? I am totally confused.

Thanks

peugeot

Hi Maria,

A provision for doubtful debts is simply a judgemental calculation - it is basically management's perception as to the %age of debtors that won't pay.

If a provision is being raised for the first time, then yes you would provide for the £645 the entries being credit bad debt provisions (balance sheet) and debit bad debts in the income statement.

It is only in subsequent years where a provision is increased by the value of the movement, so if the provision is to be 5% of £20,000 = £1,000 then the journal would be credit bad debt provision (balance sheet) of (1,000-645) = £355 and debit bad debts (income statement).

best regards
Steve