Bad debts & doubtful debts

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi there, hope someone can help...

I understand that it's a bad debt, that isn't going to be recovered you
credit the SLCA and debit the bad debts expense account and that's it, so
nothing goes in the balance sheet and it debits the P&L as an expense.
But if it's a doubtful debt it doesn't appear in the SLCA at all, but that's all
I understand. What else happens? With bad debts, it isn't cumulative, cos
it's written off at the end of the year, but with doubtful debts it is. So
I'm guessing that there is a provision for doubtful debts that will go to
the balance sheet, but what is the double entry? And what happens the next
year, does just the increase or decrease go to the provision account and
again what is the double entry?

Thanks

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Bad debts & doubtful debts

    When creating a provision for doubtful debts, or adjusting the provision, the two accounts used are:

    the Provision for Doubtful Debts a/c, and

    the Provision for Doubtful Debts: Adjustment a/c.

    The Provision for Doubtful Debts a/c is a liability, but isn't entered separately on the balance sheet, instead it is deducted from the debtors, and the net debtors (i.e. SLCA - PfDD) is entered under Current Assets.

    The Provision for Doubtful Debts: Adjustment a/c can be either an expense or an income, and is entered onto the P&L a/c (under Expenses, or Other Income respectively).

    If we are creating or increasing our provision, the double entry is
    DR Provision for Doubtful Debts: Adjustment
    CR Provision for Doubtful Debts

    If we are decreasing our provision, the double entry is
    DR Provision for Doubtful Debts
    CR Provision for Doubtful Debts: Adjustment

    The important thing to remember when doing this is that the balance at the year end on our Provision for Doubtful Debts a/c is the provision we are making. The actual DR and CR entries are only the amounts we need to change last year's provision into this year's provision.

    EXAMPLE

    Information: At the end of 2000, our Company has Debtors of £25,000. It is decided that we shall make a provision for doubtful debts of 2% of our year end debtors.[end of information]

    We need to create a Provision for Doubtful Debts of £500 (£25,000 x 2%)

    The double entry for this would be
    DR Provision for Doubtful Debts: Adjustment £500
    CR Provision for Doubtful Debts £500.

    Our accounts would look like this
    acsyear1.jpg

    In our P&L a/c, we would have an expense titled "Provision for Doubtful Debts: Adjustment" of £500, and our Balance Sheet would show Debtors as being £24,500 (£25,000-£500)

    Additional Information: At the end of 2001, our Company now has Debtors of £20,000.[end of Additional Information]

    Our provision now needs to change to £400 (2% of £20,000).
    In order to do this, we need to make an adjustment of £100 (£500-£400).

    The double entry to record this would be
    DR Provision for Doubtful Debts £100
    CR Provision for Doubtful Debts: Adjustment £100

    Our accounts would look like this
    acsyear2.jpg

    In our P&L a/c, we would have an income titled "Provision for Doubtful Debts: Adjustment" of £100, and our Balance Sheet would show Debtors as being £19,900 (£20,000-£100)

    Hope this helps, any further questions/explanations please ask :wink:
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Bad debts & doubtful debts

    I think the double entry would be dr bad debt expense cr provision for doubtful debt and all you do is decrease the debtors in the balance sheet
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Bad debts & doubtful debts

    Hi

    Gem you are right and so is Mehmet

    DR Bad Debt, CR Provision Bad debts

    But some practices (and some past papers) have a seperate account from Bad debts called provision for doubtful debts adjustments - we do at our work!

    Both are correct - and entirely depends on companies! We like to keep our bad debts separate from our provision adjustments on bad debts.

    So look out for it on the exam papers and don't be put off by it! You won't be penalised for not using one or the other as they are both DR balances.

    Lou

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