Provision for doubtful Debt

Hi just another quick question i understand on the first year when making a provision but unsure when the provision will change the following year can anyine help or maybe give me some tips on how to remember.

Thanks all :001_smile:

Comments

  • mehmet
    mehmet Registered Posts: 113 ? ? ?
    Each year, the balance on the Provision for Doubtful Debts (Balance Sheet) account must equal the provision required (e.g. 5% of debtors). The increase/decrease is recorded in the Provision for Doubtful Debts (Income Statement) account as an expense/income respectively.

    The best way to explain this is probably via an example.

    Question
    Alpha Ltd, preparing it's accounts for it's first year of trading, decides to create a provision for doubtful debts. It decides that the provision will be for 5% of it's debtors. Alpha's debtors for this year are £50,000

    Answer
    A provision for doubtful debts of £2,500 must be created. Therefore we

    DR Provision for doubtful debt (Income Statement) £2,500
    CR Provision for doubtful debts(Balance Sheet) £2,500

    Question
    Alpha is now preparing it's accounts for Year 2. This year debtors are now £70,000

    Answer
    Alpha's provision must now be £3,500. The balance on the B/S account is £2,500, and must be increased by £1,000. Therefore we:

    DR Provision for doubtful debt (Income Statement) £1,000
    CR Provision for doubtful debts(Balance Sheet) £1,000

    Question
    Alpha is now preparing it's accounts for Year 3. Debtors at the end of the year were £40,000

    B]Answer[/B]
    Alpha's provision must now be £2,000. The balance on the B/S account is £3,500, and must be decreased by £1,500. Therefore we:

    DR Provision for doubtful debt (Balance Sheet) £1,500
    CR Provision for doubtful debts(Income Statement) £1,500
  • peugeot
    peugeot Registered Posts: 624
    Hi,

    Consider the following example:

    Year end 31 March 2007
    Company A trade receivables at 31.03.07 = £20,000 and the directors feel it prudent to provide for 5% of the trade receivables.

    Therefore 31.03.07 the journal will be:

    CR trade receivables provision................................... £1,000
    DR bad debt provision (income statement). £1,000

    Year end 31 March 2008
    Company A's trade receivables at 31.03.08 now equal £40,000 and the directors feel it prudent that a 5% provision is made.

    5% of £40,000 = £2,000. We have already made a 'general# provision of £1,000 so we need to uplift this by the difference (£2,000 - £1,000) = £1,000. The journal will be the same as above.


    With general provisions you uplift/decrease by the increase/decrease in the debtors. Remember 'general' provisions are done on the trade receivables balance at the year end and are usually calculated on the increase between the previous years trade receivables total and the current years. 'Specific' provisions relate to specific bad debts e.g. customer A.

    Hope that helps.

    Kind regards
    Steve
  • peugeot
    peugeot Registered Posts: 624
    oops, clashed with Mehmet!!
  • A-Vic
    A-Vic Registered Posts: 6,970
    Great thanks i think am managing to get my head around it :001_smile:
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