Help with bad debt postings

Sam1919

Can anyone help with this please, I feel I should already know the answer so don't really want to ask the boss.......
Last years postings:
Dr bad debt written off (P&L) £1,171
Cr Provision for doubtful debts (B/sheet) £1,171

This years brought forward TB shows:
a credit balance of £1,171 in the bad debts written off account (P&L) and a nil balance in the provision for doubtful debts account (B/sheet, being the effect of two postings b/f one debit and one credit £1,171 to the provision account).

Has something gone wrong here? My understanding last year was that I was writing of the bad debt so why is it appearing in this years b/f balances on the P&L?

Many thanks in advance

Sam

phoenixd

Check where your B/S entries for provision for doubtful debts dump the balances at year end. It is just a provision so could it be that your system assumes the debt(s) might be collected in the current year. If not, it's really quite simple. Do exactly what you did last year ie dr P/L and cr B/S to return to the previous year's pre-trial balance position.

Sam1919

Thanks for the reply phoenixd. Wouldn't that mean I was providing the same provision in 2 years accounts?
Sorry if I am being a bit thick on this one.
Thanks agian
Sam

phoenixd

Hi Sam, it means you are re-making the provision because the debt is still outstanding. There will be nil effect on the P/L because it currently holds a credit on that expense account. Obviously, if the debt is outstanding 2 years running, the whole thing can then be written off rather than to the temporary provision B/S account. Hope this helps.

Sam1919

It helps a lot many thanks phoenixd. So when you say the whole thing can be written off........how would this be done? What would the postings be?
Many thanks
Sam

phoenixd

When the company is certain that the debt is irrecoverable, DR bad debt (P/L) CR Sales Ledger ie bring the relevant debtor's account down to nil.

CeeJaySix

I think you're confusing writing off the bad debt and providing against it.

What you did last year is take the hit on profit because you thought the debt was likely to irrecoverable. You didn't actually write it off, because you thought there may still be a chance of recovery, and the balance remained on your trade debtors account.

This year, whether it's an automatic function of the software's year-end routine or someone doing it manually, that provision has been reversed, which is why you've ended up with a credit in bad debts in the P&L.

Is the same debt still considered irrecoverable? If so, as phoenix suggests, you can dr P&L bad debt cr BS bad debt provision to reinstate the provision.

To write the bad debt off from this position, dr BS bad debt provision (not the P&L, as the bad debt has already had effect on your profit in the prior period). You should only be dr the P&L again if you haven't followed the initial suggestion to reinstate the provision.

Sam1919

Thanks phoenixd and CeeJaySix that's a great help :-)

Sam

phoenixd

You are welcome.