Provision for Bad Debts Unit 5

TheBFG

I have been given some work to do re taking figures from the ITB and then put them in to P&L and the Balance Sheet.

With regards to Provisions for Bad Debts - we have been told that the adjustment for bad debts account is usually a debit in the P&L and the provision for bad debts is a credit in the Balance Sheet. This is confusing me somewhat. :confused1:

All I want to know is where the provision goes on the P&L and/or the BS. For example, under current liabilities/assets etc.

I hope someone can help me!

Many Thanks!!:thumbup1:

gillwilson

P& L as an expenses to the business - ie a debit.

In BS It is deducted from trade debtors.

Hope this helps

GIll

TheBFG

Ah its the deduction from trade debtors I was getting confused about! Thank u I will give it another go!!

mark057

If your provision for bad debt increases during the financial year then you need to follow the following bookkeeping entries:

P&L:

Dr- Provision for bad debts

Balance Sheet:

CR Provision for bad debts

If the provision for bad debt figure goes down during the financial year then the following applies:

P&L:

CR Provision for bad debts

Balance Sheet:

DR Provision for bad debts.

Tha balance sheet account records the liability. So if the provision for bad debts increases during the year then the liability increases hence a credit entry. However, should the provision for bad debt figure decrease during the year then you have to debit the balance sheet account because the liability is reducing.

The exact same principle applies to the P&L account. An increase in bad debt provision for the year increases the expense so its debited to P&L. A reduction in the provision for bad debt represents a reduction in expense therefore it is credited as income.

As Alexander says in the compare the market adverts 'simples' lol.