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Bad Debts and Provision For Bad and Doubtful Debts

The document discusses accounting for bad debts and provision for bad and doubtful debts. It explains that when debts become uncollectible, a journal entry is made to write off the amount from debtors to the bad debts account. At the end of the year, any remaining bad debts are transferred to the profit and loss account. It also discusses creating a provision for bad debts at the end of each year through a journal entry that debits profit and loss and credits the provision for bad debts account. Similarly, it explains how to account for discounts allowed to debtors by creating a provision for discounts on debtors.

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subhashis de
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26 views

Bad Debts and Provision For Bad and Doubtful Debts

The document discusses accounting for bad debts and provision for bad and doubtful debts. It explains that when debts become uncollectible, a journal entry is made to write off the amount from debtors to the bad debts account. At the end of the year, any remaining bad debts are transferred to the profit and loss account. It also discusses creating a provision for bad debts at the end of each year through a journal entry that debits profit and loss and credits the provision for bad debts account. Similarly, it explains how to account for discounts allowed to debtors by creating a provision for discounts on debtors.

Uploaded by

subhashis de
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS

Accounting for Bad Debts :

When goods are sold to a customer on Credit , it is first recorded in the sales day book.

Customer A/c. -----------Dr.

To sales a/c

But once a debt is recognized as bad it should be written off immediately by passing the following entry.

Bad Debt A/c -------dr.

To Sundry Debtors A/c

When at the time of preparing the final accounts ,the bad debts written off during the period as well as
bad debt after preparation of trial balance is transferred to P/L Account :

P/L A/c ---------Dr.

To Bad Debt A/c

*** It is point to be noted the bad debt appears in the profit and loss account below the gross profit as
one of the operating expenses for the reasons explained at the beginning of this chapter . the bad debt
loss is not shown in the trading account as deduction from credit sales.

Bad debt is charge against profit.

Accounting for provision for Bad debts :

P/L A/c ---------Dr.

To Prov. For Prov. For Bad and doubtful debts a/c

Entries in the 1st Year :

Provision is created 1st Time :


1. P/L A/c ------------------------Dr.
To Prov. For bad and doubtful debts a/c

Bad debt entries after trial balance :

1. Bad Debts A/c -----Dr.


To sundry debtors a/c

Writing off bad debts in the p/l a/c

Profit and loss a/c ------------Dr.

To Bad debts a/c (Trial balance figure )

Journal entries in 2nd year and subsequent year

For Bad Debts :

1. Bad debts a/c ---Dr.


To Sundry Debtors A/c

Prov. For bad and doubtful debts a/c ----Dr.

To Bad Debts a/c

Creating necessary provision at the year end

Profit and loss a/c

To Prov. For bad and doubtful debts a/c

The calculation of the amount to be provided as doubtful bad debts

a> Closing provision required *******


Add : Bad debts written off (total) ****

Less: prov. For bad debts and doubtful debts at the beginning. ****

This amount to be charged in P/L A/c .

2nd Method ------Entry for Provision and Bad Debts


Account .
In this method the bad debt is directly charged on P/L a/c in the 1st year as well as in the
subsequent years.
Entries in the 1st year

1. Bad debts a/c -----Dr.


2. To sundry debtors a/c

For writing off bad debts in the profit and loss account

P/L A/c -------Dr.


Bad debts a/c

When provision is created for the 1st time


P/L A/c ------ Dr.

To Prov. For Prov. For Bad and doubtful debt a/c .

Entries in the 2nd year and subsequent year

For the bad debts a/c ---


Bad debts a/c -----Dr.
To sundry debtors a/c

Writing off bad debts in the profit and loss account


P/L A/c ---------Dr.
To Bad Debts A/c

Creating provision at the year end


1. If (Closing provision > Opening Provision )
P/L A/c -------Dr.
To Prov. For Bad and doubtful debt a/c

If ( Closing Provision < Opening Prov. )

Prov. For Bad and doubtful debts --------------Dr.


To P/L A/c
PROVISION FOR DISCOUNTON DEBTORS A/C

In credit sale , payment is made either at the point of sale , or after a specified period.
Many sellers offer a cash discount (sales discount) if payment is made within a specified
period of time. Cash discount is an expense . The Book value may not be the net
realizable value , so it isdesirabletoreduce the debtors figure by the probable cash
discount to be allowed. The problem lies that nobody knows that how many debtors will
avail that discount , so the rough estimate is made on the outstanding debtors.

A separate discount on debtors is opened like prov. For bad and doubtful accounts but
the only difference is that prov. For discount is calculated on the debtors’balance after
deducting the prov. For bad and doubtful a/c , the accounting treatment is same as
prov. For bad debt and doubtful debt.

When discount is allowed :

Discount allowed a/c -----------Dr.


To sundry debtors a/c

Profit and loss a/c --------------Dr.


To discount allowed a/c

When 1st time Provision for Discount on Debtors a/c is created .

P/L A/c -----------------------Dr.


To Provision for Discount on Debtors a/c
( Calculation of Provision for Discount on Debtors a/c
This figure will be calculated by applying on % on Sundry debtors after adjusting bad
debts and Provision for bad and doubtful debts a/c(New) ).e:g;

Closing Provision required ******


Add: Discount allowed during the period ******
Less: Opening Provision ******

Amount To be Provided ******

When entries in the 2nd year and subsequent year .

When discount is allowed


a> Discount allowed a/c -----Dr.

To Sundry debtors a/c


At the end of the accounting year the discount account is closed by passing the
following entries :

b. Prov. For discount on debtors a/c -----Dr.

To Discount allowed a/c

c. The balance left in prov. For discount on debtors at the of tha period is adjusted
with the prov required to be made for next financial year and accounting entry to
be passed according to the situation.
1) If the required prov. is more than the balance left :

P/L a/c -----------------------Dr.

To Prov. For Discount on Debtors A/c. **

** Calculation :

Closing provision required *****

Add: Discount Allowed during the year *****

Less : Opening Provision *****

Amount to be provided. *****

Balance Sheet as on ………………………………………………………………………………………………

Liabilities Assets

Sundry Debtors

Less: Bad Debts

Less: Prov for Bad & Doubtful Debts

Less: Prov For discount on Debtors

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