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Bad debts and doubtful debts, accruals and prepayments
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Bad debts and doubtful debts, accruals and prepayments
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MN10668 – lec 5Bad debts and doubtful debts, accruals and prepayments
Bad/irrecoverable debts
- Ad debts arise when a trade receivable (credit customer) is unable or unwilling to
pay the amount owed In respect of goods sold on credit
Treating a debt as bad is a matter of judgement. A debt may be irrecoverable because
- The credit customer cannot be traced
- Is not worth taking to court
- Has been declared bankrupt
The ledger entries for bad debts
When it is decided that the debt is irrecoverable
Debit – bad debts account
Credit – trade receivables account
At the end of the accounting period
Debit – income statement account
Credit – bad debts account
Example
, Statements
Income = increase in expenses
SOFP = if it is new (has not yet been recorded), it should be deducted from trade receivables
Doubtful debt – money you predict will be uncollectable and turn into bad debt
Bad debt – debt you have officially written off as uncollectible
The nature of provision
- A provision Is setting aside of income to meet a known or highly probable future
liability or loss, the amount and/or timing of which cannot be ascertained exactly,
and thus is an estimate
- It is an application of the prudence concept (providing for losses) and the matching
concept (it recognises the loss against the revenue that generates it)
Types of provision
- A provision for bad debts can consist of either or both of the following
o A specific provision in respect of a particular trade receivable (credit
customer) that has been identified as unlikely to pay their debts; (i.e.,
provide. Provision Mr B’s receivables as we have evidence to suggest he may
not be able to pay)
o A general provision representing an estimate, usually computed as a
percentage, of the trade receivables at the end of the accounting year who
are unlikely to pay their debts (i.e., 10%v of customers may not pay)
The ledger entries for a provision of bad debts
To create or increase a provision
Debit – income statement account
Credit – provision for bad debts account
Decrease in provision
Debit – provision for bad debts account
Credit – income statement account
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