Another provison for doubtful debts - struggling

emmag
emmag Registered Posts: 35 Regular contributor ⭐
I have been through doubtful debts with the AAT e-learning and they provide an attachment to work through.

Debtors 78,780
Have to write off a bad debt of £500
And a provision for doubtful debts needs to be created at 2.5% of debtors balance

So for the adjustments I:

DR bad Debts £500
CR Debtors £500
Bad debt done!

Then I worked out the provision for doubtful debts to be:
(78,780 - 500) x 2.5% = £1,957

The provsion for doubtful debts already had a balance of £6,050. This is where I get a bit stuck. I know I need to use the adjustment figure of 4,093 but I don't understand the answer. I thought the Provision for doubtful debts was credited and the Provision for doubtful debts adjustment account was debited?

So the adjustment would be:
CR Provision for DD £4,093
DR Provision for DD adj £4,093

But the answer is the opposite making the prov. for doubtful debts adj an income in the profit and loss account?

Confused!

Comments

  • hanapospis
    hanapospis Registered Posts: 111 Dedicated contributor 🦉
    Hi,

    I am not sure if I got your question right but if the provision for doubtful debts account already has a balance of £6,050 and you need to create a provision for DD at 2.5% of Debtors balance which is £1,957.

    You need to decrease the current balance. Provision for DD has a credit balance of 6,050 so you will debit this account with 4,093 and credit the adjustment account.

    This will be the income as you have decreased the provision for DD.

    Hope I am right if not I am sorry for confusing you.
  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
    Hello,

    The reduction in doubtful debts provision reduction would just be shown as other income on the profit & loss account titled something like 'Bad & Doubtful Debts Recovered'

    P & L Extract could look like:
    Gross Profit

    Other Income:
    Bad & Doubtful Debts Recovered

    Overhead Expenses

    Net Profift
  • jewels.p
    jewels.p Registered Posts: 1,774 Beyond epic contributor 🧙‍♂️
    hanapospis wrote: »
    Hi,

    I am not sure if I got your question right but if the provision for doubtful debts account already has a balance of £6,050 and you need to create a provision for DD at 2.5% of Debtors balance which is £1,957.

    You need to decrease the current balance. Provision for DD has a credit balance of 6,050 so you will debit this account with 4,093 and credit the adjustment account.

    This will be the income as you have decreased the provision for DD.

    Hope I am right if not I am sorry for confusing you.

    I have been doing this as well today and got stuck but think I understand it now. I was just trying to think how to write an explanation but you got in there first. Thats spot on (I think):thumbup1:
  • jewels.p
    jewels.p Registered Posts: 1,774 Beyond epic contributor 🧙‍♂️
    emmag wrote: »
    I have been through doubtful debts with the AAT e-learning and they provide an attachment to work through.

    Debtors 78,780
    Have to write off a bad debt of £500
    And a provision for doubtful debts needs to be created at 2.5% of debtors balance

    So for the adjustments I:

    DR bad Debts £500
    CR Debtors £500
    Bad debt done!

    Then I worked out the provision for doubtful debts to be:
    (78,780 - 500) x 2.5% = £1,957

    The provsion for doubtful debts already had a balance of £6,050. This is where I get a bit stuck. I know I need to use the adjustment figure of 4,093 but I don't understand the answer. I thought the Provision for doubtful debts was credited and the Provision for doubtful debts adjustment account was debited?

    So the adjustment would be:
    CR Provision for DD £4,093
    DR Provision for DD adj £4,093

    But the answer is the opposite making the prov. for doubtful debts adj an income in the profit and loss account?

    Confused!

    Glad to hear I wasnt the only one tearing my hair out with this today. Hope you understand it better now. It took me a while!:laugh:
  • emmag
    emmag Registered Posts: 35 Regular contributor ⭐
    Thank you for your replies. So am I correct in thinking that if the percentage of debtors is greater than the provision for DD already on the account, then the provision would become an expense in the Profit and Loss account? But still remain a liability on the Balance sheet?
  • CJC
    CJC Registered Posts: 1,657 Beyond epic contributor 🧙‍♂️
    Provision for DDs is always going to be a liability on the balance sheet*. Any adjustments to that provision need to be recorded in the P&L - an increase in provision will be an expense and a decrease will be income.

    [edit] *This is generally shown by subtracting the amount from the existing figure for Debtors rather than a specific entry in the liabilities section of the B/S
  • emmag
    emmag Registered Posts: 35 Regular contributor ⭐
    Thank you I think I've finally got it:thumbup:
  • mally
    mally Registered Posts: 14 New contributor 🐸
    emmag wrote: »
    I have been through doubtful debts with the AAT e-learning and they provide an attachment to work through.

    Debtors 78,780
    Have to write off a bad debt of £500
    And a provision for doubtful debts needs to be created at 2.5% of debtors balance

    So for the adjustments I:

    DR bad Debts £500
    CR Debtors £500
    Bad debt done!

    Then I worked out the provision for doubtful debts to be:
    (78,780 - 500) x 2.5% = £1,957

    The provsion for doubtful debts already had a balance of £6,050. This is where I get a bit stuck. I know I need to use the adjustment figure of 4,093 but I don't understand the answer. I thought the Provision for doubtful debts was credited and the Provision for doubtful debts adjustment account was debited?

    So the adjustment would be:
    CR Provision for DD £4,093
    DR Provision for DD adj £4,093

    But the answer is the opposite making the prov. for doubtful debts adj an income in the profit and loss account?

    Confused!

    Step 1:
    DR bad Debts £500
    CR Debtors £500

    Step 2:
    Dr Allowance for debtors £1957
    Cr debtors £1957

    Step 3:
    Dr Allowance for debtors £4093
    Cr bad debts (with decrease in allowance for debtors) (6050-1957) £4093

    Step 4:
    Dr Bad debts £3593
    Cr I/S £3593 Income in the I/S

    Hope this helps (and thats its correct)!
  • clio
    clio Registered, Tutor Posts: 12
    Thank you all so much for this. My text book explains it appallingly. I have been totally bamboozled and now thanks to you and bookkeepers.org I have got it. Hooray!!
  • Nick Craggs
    Nick Craggs Registered, Tutor Posts: 14 New contributor 🐸
    I have a blog on this which might be of help: http://www.firstintuition.co.uk/bad-debts/
    AAT Distance Learning Manager First Intuition and AAT Council Member
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