provision for bad debts HELP

System
System Posts: 100,534 πŸ€– Admin πŸ€–
edited June 18 in AAT student discussion
I've just done a practise simulation and the real thing and I still can't get it to all balance at the end, I think I'm going wrong with the prov. for bad debt, can someone please help???

Question was "it has been decided to write off the bad debt and adjust the bad debts prov. to 2%, calculate the prov".

There are already balances in the bad debt and prov a/c so surely i don't need to change the SLCA figure, do I? As there's already a bad debt balance I assume that just gets taken to the P&L then the difference between the opening bal on the prov. and the end balance also gets taken to the P&L. Then when I calculate the balance sheet the figure for the debtors less prov. is that the end balance on the prov. or the increased amount? Surely I should be left with no balance on the bad debt and a balance on the prov.? Oh I'm lost please help....

Comments

  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    provision for bad debts HELP
    FPettifer wrote:
    ...Question was "it has been decided to write off the bad debt and adjust the bad debts prov. to 2%, calculate the prov"...There are already balances in the bad debt and prov a/c so surely i don't need to change the SLCA figure, do I? As there's already a bad debt balance...
    When you write-off a bad debt, it will be taken out of the SLCA balance. You do that before you calculate the 2% prov. amount. Once you deal with the write-off part, you calculate the 2%. If you have a figure in the prov account, say, £5000 and the 2% comes upto £4500, you reduce your prov. figure by debiting it with £500 and crediting the Expense account. If the 2% is higher than the balance you've got in the prov. account, the procedure is to increase it by the difference. I hope I didn't complicate it for you
    Regards
    Tom
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Hi

    If there is a balance already in the bad debt a/c surely its already been taken from the SLCA figure? That's why I'm confused, surely I work out the 2% on the debtors as it stands, add the increase to the bad debt and thats what is written off. I haven't been given any others figures for bad debt other than the one in the a/c already????????? Other than that I understand what you said, I'm just lost as to the bad debt already being in the a/c
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP
    FPettifer wrote:
    If there is a balance already in the bad debt a/c surely its already been taken from the SLCA figure?
    Balances in the Bad Debt a/c are not necessarily taken from the SLCA. When you make your year-end adjustments, you will calculate provision for bad debt, assuming that, say 2% of your debtors balance may never be collected. This figure is then credited to the Provision a/c(and not to the SLCA). You will be charging Bad Debt to your SLCA if it is a direct write-off, if you are given an amount to write-off. This usually happens when you get news about one of your debtors going out of business or unable to pay thier debts and your company decides to write-off the balance they owe you.
    surely I work out the 2% on the debtors as it stands, add the increase to the bad debt and thats what is written off.
    The 2% you calculate is not your write-off amount. That is your provision. For a write-off, you will be given a specific amount for a particular client. Because when you do a write-off, it will have to be taken out of the customer's account as well.


  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    ?
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Lots of chat there so ill just put my own opinion in:

    Write off bad debts:
    Dr. Bad Debts expense
    Cr. Sales Ledger Control Account
    (The writing off of bad debts has nothing to do with the provision, technically)

    Creation of a provision where none has existed before:
    Dr. Bad Debts Expense
    Cr. Provision for Bad Debts (Liability)

    Increase of an existing Provision for bad debts:
    Dr. Bad Debts Expense
    Cr. Provision for Bad Debts

    Decrease of an existing Provision for Bad Debts:
    Cr. Bad Debts Expense
    Dr. Provision For Bad Debts

    Always seemed to me adjusting the provision was a good way to cook the books, as you can subjectively adjust your profit. Any of you guys in practice got a comment on that?

    Hope this helps
    Adrian



  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    But there's already monies in the bad debt a/c so surely when it asks to write this off the double entry is:

    CR Bad debt
    DR P&L a/c

    Then I do the 2% on the amount in the SLCA then the difference (which is an increase) gets posted to the bad debt:

    DR Bad debt
    CR Provision of bad debt

    Yes/no?
    However I still can't get the balance sheet to be equal to the capital etc and I can't see where else I have gone wrong :cry:
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Hello FPettifer.

    Your Provision for Bad Debt reduces the value of the Asset, i.e. Debtors, and as such is a Balance Sheet item - it does not appear on your P&L Account.

    Scott.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    FPettifer


    Sorry but you dont seem to have read my post read it again and if you still have questions please can you reword them.

    "Bad Debt Account" what does that mean? Are you talking about the provision or the expense?
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Scotty

    Sorry mate but you are wrong or have badly worded what you said. The provision for bad debts does affect the P&L account when it is created and when it is adjusted. Read my post.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Hi Lincs.

    I said it doesn't APPEAR on your P&L Account.

    Scott.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Ok your all confusing me now :? There is already a bad debt expense account with a balance in it, there is already a provision for bad debt account with a balance in it. Question is to write of the bad debt and calculate the provision increase on remaining debtors. Therefore the way i see it as there is already an amount in the bad debt expense, its already been taken from the SLCA, so i just write off the bad to p&l as its an expense then do the provision on the amount that is already in the SLCA. It hasn't given me no other figure for the bad to write off so i assume its the amount already in the account.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Maybe this will help more:

    Balances -

    SLCA DR £60,000
    Bad debt expense a/c DR £2000
    Provision for bad debt a/c CR £3000

    Question was "it has been decided to write off the bad debt and adjust the bad debts prov. to 2%, calculate the prov (increase) and post to relevant ledgers"
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Sorry Scotty, I was half asleep!
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Aaaah come on Lincs, no need for that. I'm a bloody qualified accountant and have been corrected dozens of times on here.

    Come on mate! None of us are perfect (just ask Amy in our house!!!) :lol: (And in a purely professional manner may I add!!!)
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    What you on about Steve I said I was sorry? I guess it wasn't worded to well so i've edited now.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Hi. Now someone else double check i'm right but what i reckon you should do is...
    Taking into account that you haven't been given a figure to write off for the bad debt but the bad debt expense a/c has a figure in it already. I would presume this is the figure that has been written off from the SLCA and you are required to finish posting it to P+L...
    CR Bad debt expense a/c £2000
    Dr P+L £2000

    Now the provision for bad debt was at £3000 Cr but now needs re-calculating.
    The SLCA is £60000 and 2% of that is £1200. Now I would want to then adjust the Provision for bad debt from £3000 to £1200 (2% of SLCA); so I would...
    Dr Provision for bad debt £1800
    Cr P+L £1800

    As the provision in this case has worked out as a reduction it should be added to the Gross Profit figure of the P+L and not a debt in the Overheads.

    I hope this helps.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP


    Not sure I understand the reasoning behind this sentence, if its adjustment to bad debts surely thats an administrative expense adjustment? (i.e. is is made in the overheads)

    "As the provision in this case has worked out as a reduction it should be added to the Gross Profit figure of the P+L and not a debt in the Overheads. "
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Sorry, probably not worded brilliantly...
    What i meant (and do correct me if i'm wrong) is that if you increase the provision for bad debts (doubtful debts) you will debt the P+L a/c (under heading 'less overheads') whereas if you reduce the provision for bad debts (doubtful debts) you credit the P+L a/c (under the heading 'add other income').
    Does this make sense now?
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    It does make sense, and maybe im wrong, but the credit would still come after gross profit and not before.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Yes, i agree the 'provision for doubtful debts (reduction)' would come after the Gross Profit figure on the P+L a/c. After you have worked out the Gross Profit figure you then have to 'add other income' and then you 'Less Overheads' to give your Net Profit figure.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    and they lived happily ever after!
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Ok I've given bad figures. If it was an increase, doesn't it get posted to the bad debt a/c? If so would I then have to write this amount off as well as its year end the bad debt a/c gets written off doesn't it. As far as I know the bad debt a/c should have nothing in it at year end.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP
    FPettifer wrote:
    Ok I've given bad figures. If it was an increase, doesn't it get posted to the bad debt a/c? If so would I then have to write this amount off as well as its year end the bad debt a/c gets written off doesn't it. As far as I know the bad debt a/c should have nothing in it at year end.

    FPettifer I received my simulation and I have the same problem. Also something is wrong in the solution, you can check my other topic. I think as well there is a mistake for the bad debt and provision a/c.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    error
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    error
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    All sorted now, got it back the other day, went through it today. I was just making the questions more complication that needs be. I was right in thinking when there is already an amount in the bad debt a/c then you don't need to deduct it again from the SLCA it just gets written off to the P&L. Shame there are not activities in the work books explaining this, it would of be more helpful. :lol:
    Manuelissima if you need help let me know, I've just spent the morning figuring it all out.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP
    FPettifer wrote:
    Shame there are not activities in the work books explaining this, it would of be more helpful. :lol:

    I know...that's why I don't like this book...only simple little example and complicated activities/simulation
    FPettifer wrote:
    Manuelissima if you need help let me know, I've just spent the morning figuring it all out.

    The simulation you had is the one from Pickering Engineering and amounts for bad debt task
    SLCA £148430
    PROV £3250
    BAD DEBT £2200?

    The only entry they did in adjustements is
    DR Increase Provision Bad Debt
    CR Provision Bad Debt

    an entry I have never seen in my life!!:shock: I think it's wrong! :shock:

    Thank you for your help, you are very kind


  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Yeah that's exactly what confused me. There was no teaching of "when there's already an amount in the bad debt a/c" so that was my first problem. Then i thought the increase amount got posted to the bad debt a/c and provision for bad debt thats why I completely got it wrong. They just CR the provision with the increase and DR a whole new a/c called Increase in provision, where were we ever informed this, from what I learnt you DR the bad debt a/c???? I presume you got it wrong as well, did you put it in to the bad debt and clear that off? I did as that's what the book teaches you.
  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    I presume you got it wrong as well

    Of course! and so all my extended trial balance, P&L and Balance Sheet!

    but wait...another surprise!
    in the P&L they recorded the bad debs written off (in my case £2200) and the increased provision!

    very confusing! so they haven't done any entry for the debt been written off in the adjustment but in the P&L suddenly coming up!

  • System
    System Posts: 100,534 πŸ€– Admin πŸ€–
    Re:provision for bad debts HELP

    Hi FPettifor

    did you settle your query on this one? It's just that i have an idea as to the answer of your query.

    before posting -want to make sure whether it is still required.

    Chris

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