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UNIT 6 Bad Debts And Provision For Doubtful Debts

Copyright 1995 by Thames Management Centre International. All right reserved. No part of this lecture notes may be reproduced in any form or by any means !ithout the permission in !riting from Thames.

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PRINCIPLES OF ACCOUNTING

BA212

6.1

Bad Debts
Bad Debts are a. Customers debts that are irrecoverable b. Losses to the company c. On the debit side d. Transfer to P/L Account under !penses Dr. Bad Debts A/c "P/L A/c# !ample $ T%o of your debtors& A /B Co. %ho o%es you '()) and C/D Co. %ho o%es you '$))& %ent ban*rupt. +hile A/B Co. can only afford to pay $), of %hat he o%es you& C/D Co. cannot pay a sin-le cent. .eres ho% you record into your led-er and P/L Account. Ans%er to !ample $ A and B Account Date Particulars Balance b/d Amt ()) ()) Date Particulars Cash Bad Debts Amt () $/) ()) Cr. Debtors A/c

C and D Account Date Particulars Balance b/d Amt $)) Date Particulars Bad Debts Amt $))

Bad Debts Account Date Particulars A 0 B Co. C 0 D Co. Amt $/) $)) (/) Date Particulars Transfer to P/L A/c Amt (/) (/)

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BA212

PRINCIPLES OF ACCOUNTING

Profit & Loss Account 1ross Profit Less !penses AdvertisinBad Debts 2et Profit !!! (/) !!! !!!

6.

Provision For Doubtful Debts !Provision for Bad Debts"


Customers debts that are uncertain of bein- recovered. 3t is a -eneral provision on total debtors in the boo*s. Dr. P/L A/c !ample ( $st 4ear Debtors 5 '6&))) $), Provision for Doubtful Debts Ans%er to !ample ( Led#er$ Provision for Doubtful Debts Account Date Particulars Balance c/d Amt 6)) Date Particulars P/L A/c Balance b/d Amt 6)) 6)) Cr. Provision for Doubtful Debts A/c

Tradin#% Profit & Loss Accounts$ 1ross Profit Less !penses Provision for Doubtful Debts 2et Profit 6)) !!!! !!!!

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PRINCIPLES OF ACCOUNTING

BA212

Balance &'eet$ Current Assets Cash5in5hand Closin- 7toc*s Debtors Less Provision for bad debts !!! !!! 6&))) "6))# 8&6)) !!!!

!ample 9 ND ()A* D)BT+*& ,-%... 5 3ncrease in debts& therefore increase in provision.

"$), Provision for Doubtful Debts# Ans%er to !ample 9 Led#er$ Provision for Doubtful Debts Account Date Particulars Balance c/d Amt /)) /)) Balance b/d : Date Particulars Balance b/d P/L A/c : Amt 6)) 9)) /)) /))

7ince '6)) had been set for the previous year& %e only need to ta*e out another '9)) to complete the $), provision for '/)).

Tradin#% Profit & Loss Accounts$ 1ross Profit Less !penses Provision for Bad Debts 2et Profit 9)) "+e only deduct %hat %e for* out this year# !!!! !!!!

Balance &'eet$
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BA212

PRINCIPLES OF ACCOUNTING

Current Assets Cash5in5hand Closin- 7toc*s Debtors Less Provision for Bad Debts !!! !!! /&))) "/))# ;&()) !!! !ample 8 /*D ()A* D)BT+*& ,0%... 5 Decrease in debts& therefore decrease in provision

"$), Provision for Doubtful Debts# Ans%er to !ample 8 Led#er$ Provision for Doubtful Debts Account Date Particulars P/L A/c Balance c/d Amt : 8)) 8)) /)) Date Particulars Balance b/d Amt /)) /)) 8))

Balance b/d :

7ince there is a decrease in provision& the outstandin- %ill be added bac* into the 1ross Profit.

Tradin#% Profit & Loss Accounts$ 1ross Profit Add Decrease in Provision for Doubtful Debts Less !penses AdvertisinTransport 2et Profit !!!! !!!! !!!! !!!! 8)) !!!!

Balance &'eet$

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PRINCIPLES OF ACCOUNTING

BA212

Current Assets Cash5in5hand Closin- 7toc*s Debtors Less Provision for Bad Debts !!! !!! 8&))) "8))# 9&<)) !!!

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BA212

PRINCIPLES OF ACCOUNTING

6./

)1ercise
=uestion $ 3t is decided to maintain the provision for doubtful debts in the boo*s of B. +ilson 0 Co. at 6, of the 7undry Debtors. The present provision stands at '$(). At 9$ December& the 7undry Debtors amount to '9&$)). >e?uired@ 1ive the Aournal entries and sho% the Led-er Accounts to carry out this decision& includin- the Balance 7heet.

=uestion ( Tee is a trader in second hand -oods. At the end of the financial year ended 9$ December $B!<& the sales led-er listin- sho%s a total amount of '86&))). A detailed analysis of the listin- sho%s that one of the debtors o%nin- '6&))) has since been declared ban*rupt. 3n addition some of the debts outstandin- has remained unpaid for several months. As such& he has decided to provide provision on doubtful debts $), on the remainindebtors. >e?uired@ "a# "b# Calculate the amount of provision for doubtful debts. Prepare an e!tract of the entries to be sho%n in both the Profit and loss account and the Balance 7heet for the year ended 9$ December $B!<.

=uestion 9 Assumin- Tees total debtors for the year ended 9$ December $B!; amounted to '/)&))). 3ncluded in the debtors amount& another debtor o%in- '$)&))) has since closed do%n its business. 3t is Tees policy to continue to provide provision for the doubtful debts on the remainindebtors. >e?uired@ "a# "b# Calculate the amount of provision for doubtful debts re?uired for the year ended 9$ December $B!;. 7ho% the respective entries in both the Profit and Loss Account and Balance 7heet as at 9$ December $B!;.

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