Chapter 5 Bad Debts, Bad Debts Provision and Bad Debts Recovered

(a) Bad Debts: Debtors who are bankrupt and their amounts due are written off. These are losses to the business therefore they are debited. Double Entry: Debit: Credit: Bad Debts Debtors

At year-end Bad Debts are transferred to the Profit and Loss Account as Expenses. Double Entry: Debit: Credit: Profit and Loss Bad Debts

Example: G.Borg, one of our debtors owed the business Lm400. He failed to pay and we decided to write off this amount due from the business accounts. Sales Ledger Dr 2006 Jan-01 Balance b/d G. Borg Account 2006 400 Jan-31 Cr Bad Debts 400

General Ledger Dr 2006 Jan-31 G.Borg Bad Debts Accounts 2006 400 Dec-31 To Profit and Loss Cr 400

Profit and Loss Account (Extract) for the year ending 31 December 2000 Expenses Bad Debts 500

(b) Bad Debts Provision or Doubtful Debts Provision: This is an estimated loss on debtors. It is calculated as a percentage on debtors who might become bankrupt in the future. The percentage is based: On past experience (this is known as General Provision). When debtors accounts are examined individually and any debt likely to become bad is listed. (This is known as Specific Provision).

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Example: 2004 Debtors Bad Debts Provision Workings: 2004: 5% x 12,000 = Lm600 (Creation of Bad Debts Provision) 2005: 5% x 20,000 = Lm1,000 (Increase of Lm400) 2006: 5% x 16,000 = Lm800 (Decrease of Lm200) Dr 2004 Dec-31 Balance c/d 2005 Dec-31 Balance c/d Bad Debts Provision Account Lm 2004 600 Dec-31 To Profit and Loss 1,000 1,000 2006 Dec-31 To Profit and Loss Dec-31 Balance c/d 200 800 1,000 2006 Jan-01 Balance b/d 2005 Jan-01 Balance b/d Dec-31 To Profit and Loss Cr 600 600 400 1,000 1,000 1,000 2007 Jan-01 Balance b/d Double Entry Used: Creation Debit: Profit and Loss Credit: Bad Debts Provision (With amount created) Debit: Profit and Loss Credit: Bad Debts Provision (With amount of increase) Decrease Debit: Bad Debts Provision Credit: Profit and Loss (With amount of decrease) 800 Lm12,000 5% 2005 Lm20,000 5% 2006 Lm16,000 5%

Increase

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Profit and Loss Account (Extracts) for the years ending 31 December 2004/05/06 2004 Gross Profit Less Expenses Creation of Bad Debts Provision 600 2005 Gross Profit Less 2006 Gross Profit Revenues Decrease In Bad Debts Provision Expenses Increase of Bad Debts Provision

Lm xxxxxx

Lm xxxxxx

400 Lm xxxxxx 200

Balance Sheet (Extracts) as at 31 December 1999,2000,2001 Currents Assets Less Debtors Bad Debts Provision Currents Assets Less Debtors Bad Debts Provision Currents Assets Less Debtors Bad Debts Provision Lm 12,000 (600) Lm 20,000 (1,000) Lm 16,000 (800) Lm 11,400 Lm 19,000 Lm 15,200

(c)

Bad Debts Recovered: When a debt written off as Bad in previous years is recovered / received in later years.

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Example: G.Borg was bankrupt on 31 January 2000. He owed the business, Lm200 and this amount was written off as a Bad Debt. On 30 July 2006 this amount was recovered. Dr 2006 Jul-30 (1) Bad Debts Recovered G.Borg Account Lm 2003 Jul-30 (2) Cash 200 Cr Lm 200

Dr 2003 Dec-31 (3) To Profit and Loss Dr Jul-31 (2)

Bad Debts Recovered Account Lm 2003 200 Jul-31 (1) G.Borg Cash Account 200

Cr Lm 200 Cr

G.Borg

Profit and Loss Account (Extract) for the year ending 31 December 2003 Gross profit Revenues: Add Bad Debts Recovered Lm xxxxx 200

Double Entry Used: (1) Debit: Debtor Account Credit: Bad Debts Recovered Account

(with amount of Debt)

(2)

Debit: Cash/ Bank Account Credit: Debtor Account (with amount received from debtor) Debit: Bad Debts Recovered Account Credit: Profit and Loss Account (with amount recovered to be shown as gain in the profit and loss account)

(3)

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Exercises 1. L.Cauchi commenced business on 1 May 2000 as a wholesaler, selling furniture to retail outlets. The final accounts of his business are prepared on 30 April each year. The Bad Debts Provision amounts to 5% of debtors. The following information relates to the 3 years ending 30 April - 2003. Year Ending : 30 Apr 2001 Lm 18,000 800 30 Apr 2002 Lm 23,000 1,000 30 April 2003 Lm 20,000 900

Total Debtors at year end : Bad Debts written off :

The Provision for Bad Debts was maintained each year at 5% of the Total debtors at year end. From the information given above prepare for the three years: a. A Bad Debts Account; b. A Provision for Bad Debts Account; c. Relevant extracts of the Profit and Loss Accounts; d. Balance Sheet Extracts. 2. During the year ended 31 May 2001 T.Hili, a sole trader, incurred the following bad debts : P. Sammut Lm25, T.Ebejer Lm31; F.Abela Lm18; G.Galea Lm43; T.Tanti Lm52. At the close of business on 31 May 2000, T.Hilis Provision for Bad and Doubtful debts had a balance of Lm130. At the close of business on 31 May 2001 his debtors amounted to Lm3840 and on this date T.Hili decided to increase the Provision for Bad and Doubtful Debts to 5% of the debtors (Lm3840). You are required: a. Draw up the Bad Debts Account and the Provision for Bad Debts Account for the year ended 31 May 1999, showing the amounts to be transferred to the Profit and Loss Account. Distinguish between Bad Debts and Bad Debts Provision.

b.

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3.

A business had always made a provision for bad debts at the rate of 5% of debtors. On 1 January 2000 the provision for bad debts brought forward from the previous, was Lm200. During the year to 2000 the bad debts written off amounted to Lm500. On 31 December 2000 the remaining debtors totalled 6,000 and the usual provision for bad debts is to be made. You are to show for 2000: (a) the bad debts account; (b) the provision for bad debts account; (c) Profit and Loss extract and Balance Sheet extract.

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