Limited company accounts - provision in doubtful debts

taraskyn

Osborne Book - Limited Company Accounts - Workbook exercise 2.6
My question is: why provision in doubtful debts amount (40) is not deducted from receivables amount in statement of financial position?
Provision in trial balance was 20, but it was increased to 40
Trade receivables in trial balance: 350 (this amount remains the same in SFP) - why?????? it should be 350 - 40 = 310
Can anyone explain please?
Thanks!

villapb

An increase in provision of bad debts of 20 would be a expense in the pl and decrease pl by 20, shown on debit side of tb as expense of increase of bad debts provision, on credit side of tb as increase in provision of bad debts so balance, only bad debts affect slca not provision

taraskyn

Thanks for your reply.
You are absolutely right, but it did not answer my question.
I understand that an increase in provision is an expense in statement of comprehensive income ( SCI ). And a double entry in trial balance ( TB ) will be achieved as you explained - Dr expense 20, Cr provision increase 20. But in statement of financial position ( SFP ) it has to be reflected. If we allow that a certain amount from receivables will not be received then we have to show true position of the company in SFP by deducting the provision from trade receivables. It just has to be done. Sometimes in TB there is no provision because it could have been accounted for in receivables amount already. But if TB include provision then we have to deduct it. Double entry would still remains true. Take away 40 from Dr side ( receivables ) and take away 40 from CR side provision.
And as you said it will only effect SLCA. And in SFP it has to be shown but it does not show that receivables are effected ( 350 still remain the same in SFP as in TB).
Anyway there are a few similar exercises in tutorial book and there provision is deducted from receivables.
I need to know if maybe there is a trick or something...

villapb

Ok the simple way to explain .......trade receivables balance will give you the debtors balance on the balance sheet.
The provision for doubtful debts will give you a balance figure to reduce the debtors fiqure, you put in the current assets, line by line
.
ie
Current assets at 1/11/13
Debtors 10000
Provision for Doubtful Debts 1000
. 9000
So you have debtors of 10000 but maybe only 9000 will go into the bank.........

An increase in provision next year will be expense, decrease will be revenue increase.
Remember in the next year if the 1000 becomes then a bad debt as you thought you now right it off, then credit the trade rec and debit the pl......
Provision is a liability really of the business ie in credit control the 90 days overdue accounts......how many accounts give credit that may default in he future...

taraskyn

Hi there!
Sorry for late reply.
You lost me here completely because I think you are saying things exactly what I am trying to prove.
So a question for you - yes or no only - in balance sheet does the amount of trade receivables under current assets have to be reduced by amount of provision for doubtful receivables?
Thanks.

salih

Can someone help this is urgent please. a company made a following purchase and sales of a product during the year to 31 December 20X0.

Date No of units. Cost per unit £
1 Jan Opening Inventory 500 2.80
8 May Purchased 1,000 3.00
11 Aug Purchased 600 3.60
29 Nov Purchased 1,900 4.20

The company sold 3,000 units during the year @ £6.00 per unit
The cost of inventories is calculated using the FIFO method

The company gross profit for the year ended 31 December 20X0 will be?

If someone can help with this question this would mean alot, Thank you

villapb

Yes lol..............

villapb

You asked .................Trade receivables in trial balance: 350 (this amount remains the same in SFP) - why?????? it should be 350 - 40 = 310 ..............


But in the balance sheet..... debtors is shown 350, then provision is shown next 40.............to give 310.
Not shown as one line debtors 310...........hope this clears it up.............ps the books like bpp make mistakes so don't rely 110% on them .........id rely 98%

taraskyn

LOL...!!!
Sorry for the confusion. We definitely were talking about the same things. It is very clear now.
I just cant believe I found a mistake.
It's just I found mistakes in the past but after discussing them here in this forum they turned out not to be mistakes.
That's why I thought that maybe here is a trick I am missing.
I hope there won't be many mistakes in level 4.
Anyway thanks for your time. I appreciate it.

CeeJaySix

Salih,

Revenue = 3000 x 6 = 18,000

Opening stock = 500 x 2.80 = 1,400
Purchases = 1000 x 3 + 600 x 3.60 + 1900 x 4.20 = 13,140
Less Closing stock = 1000 x 4.20 = 4,200 (all at 4.20 as 3000 have been sold, 500 + 1000 + 600 = 2,100 of the lower priced purchases sold, plus 900 of the 4.20 purchases)

Cost of sales = 1,400 + 13,140 - 4,200 = 10,340
Gross profit = 18,000 - 10,340 = 7,660

salih

Thank you guys for all your help, been studying for hours i have a clear mind on it now. Thank you again.