Lecture note:

Bad debts, bad debts recovered, provision for doubtful debts and provision for
discount allowable

Bad debts
 Are uncollectible amount of debts because the debtors are either die, bankrupt,
cannot be traced or unable to pay.
 Bad debts are a normal business expenses
 They must be charged to Income Statement as an expense when calculating the
profit or loss for the period.

Double entry to record the bad debts

a) Whenever a debtor is confirmed unable to pay the debt, a double entry is:-

Dr. Bad debt expenses a/c xxxxx

Cr. Debtor’s a/c xxxx

b) At the end of the accounting period, the total amount of bad debts written off is
charged as an expense to the Income Statement:-

Dr. Income Statement xxxx

Cr. Bad debts expenses a/c xxxxx

Example 1:-

Raziki, a debtor is unable to settle his debt of RM500. At the end of accounting period
(assuming that AFQ Enterprise closed their accounts on 31/12/2007), it was decided that
the amount should be write off as a bad debt.

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Bad debts recovered

 When the business receives certain amount of money from debtors which their
debts had been written off as bad debts.
 Bad debts recovered are considered to be revenue to the business.
 Double entry to record bad debts recovered:-

Dr Cash/Bank a/c xxxx

Cr. Bad debts recovered xxxx

At the end of the accounting period, transfer bad debts recovered in the
Income Statement.

Dr. Bad debts recovered xxxxx

Cr. Income Statement xxxxx

Based on example 1, assume that Raziki pays RM100 to AZQ Enterprise on 12/2/2008.
Show the relevant accounts to reflect the transaction.

Provision for doubtful debts

 The amounts that may not be collected are called doubtful debts.
 The business is uncertain which accounts are likely to be bad and what amounts
are likely to be bad.
 Therefore, at the end of an accounting period, an estimate must be made on what
amount of the outstanding debtors will go bad.
 The reason for providing doubtful debts is so that the business will not
overcast/overstate its profit figures or undercast /understate its losses.

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Double entry to record provision for doubtful debts

Dr. Doubtful debts xxxx

Cr. Prov. For doubtful debts xxxx

At the end of the accounting period

Dr. Income Statement xxxx

Cr. Doubtful debts xxxxx

Eg 1:

The total amount of debtors in the book is RM10,000. On 31/12/2005, it was decided
that to provide 5% as provision for doubtful debts.

Eg:2
Let say in 2006, total debtors a/c amounted to RM13,000. and Provision for doubtful
debts is provided at 10%.

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Eg: 3

Let say in 2007, total debtors a/c is amounted to RM10,000 and provision of doubtful
debt is provided at 5%.

Provision for discount allowable

Some debtors may pay promptly and take advantage of any cash discount offered. So
normally, a company will make a provision for discount taken by the debtors.
Exactly how much to be set aside for the provision discount allowed is depends on the
past experience of a company. Commonly, it’s calculated as a percentage of the net
outstanding debtors (Debtors less PFDD for the year).

Eg 1:

At the end of the year 2006, Salmah had debtors owing amounted to RM10,500.
Provision for doubtful debts amounted to RM500 and provision for discount allowable
amounted to 1% of the outstanding debtors.

Eg 2:

Let say, for year end 31/12/2007, total outstanding debtors of Salmah is RM12,700.
Provision for discount allowable is fixed to 1%.