How to classify Bad debt?

coin99

Hi everyone, I'm doing Unit 11 DFS with Kaplan book at the moment. I'm confused by the text book regarding the classification of bad debt. Is it belonging to Distribution cost or Admin Expense when prepare the company's income statement? The reason why I ask is because that Activity 3 in chapter4, the allowance for doubtbul debt has been treated as the Admin expense, but in the same chapter, the other activity, bad debt is classified as distribution cost.

Could anyone tell me why there are different classification for bad debt and doubtful debt?

Thank you in advance.

Regards,

Xin

A-Vic

Distribution is for the product admin is for everything else - sorry short but to the point

coin99

Thank you for your reply. Is that mean doutbful debt is not belonging to product, so it is treated as admin expense?

A-Vic

coin99 wrote: »

Thank you for your reply. Is that mean doutbful debt is not belonging to product, so it is treated as admin expense?

Do you mean a provision for doubtful debts?

coin99

yes, in question, it said " increase in allowance for bad debts".

coin99

anyone can help? still confused with this

sdv

coin99 wrote: »

Hi everyone, I'm doing Unit 11 DFS with Kaplan book at the moment. I'm confused by the text book regarding the classification of bad debt. Is it belonging to Distribution cost or Admin Expense when prepare the company's income statement? The reason why I ask is because that Activity 3 in chapter4, the allowance for doubtbul debt has been treated as the Admin expense, but in the same chapter, the other activity, bad debt is classified as distribution cost.

Could anyone tell me why there are different classification for bad debt and doubtful debt?

Thank you in advance.

Regards,

Xin

Bad Debts should be classified as an Admin expense from the choice of Distribution costs, Finance Costs and Admin costs. I have tried to obtain the definitions of Distribution costs and Admin costs. It is self explanatory. see the websites listed below.

The doubt debt double entry is Credit PROVISON FOR BAD DEBT and Debit Bad debt (AAT Chief Examiner Guidance as per our tutor). Therefore the doubt debts are same as bad debts from P&L point of view.

What are distribution costs

Cost or expense incurred in moving goods from the point of production to the point of consumption. Also called distribution expense

http://www.businessdictionary.com/definition/distribution-cost.html

Distribution Costs costs associated with the holding of inventory and the shipment of goods to customers.

http://en.mimi.hu/marketingweb/distribution_costs.html

What are Admins costs?

Expense incurred in controlling and directing an organization, but not directly identifiable with financing, marketing, or production operations. Salaries of senior executives and costs of general services (such as accounting, contracting, and industrial relations) fall under this heading. Administrative costs are related to the organization as a whole as opposed to expenses related to individual departments. Also called administrative expenses

http://www.businessdictionary.com/definition/administrative-cost.html

Should the bad debt expense be net off from the gross profit? or should it be classified in other operating expense?

The answer is: bad debt expense should be classified as General & Administrative Expense in Profit & Loss.

http://myauditing.blogspot.com/2007/10/27-classification-of-bad-debt-expense.html