Balance Day

Adjustments:
*Bad Debts
*Bad Debt Recovered
*Allowance for Doubtful
Debts

Learning Objectives
At the end of this topic, students should
be able to:
Make adjustment on accounts
receivable for bad debts, bad debt
recovered (if any)
Calculate and record allowance for
doubtful debts

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Accounting for Accounts

Receivable

Business also has to make adjustments on accounts

receivable for bad debt expense, bad debt
recovered and allowance for doubtful debts

Business selling goods either cash or credit but most

of business sales are on CREDIT

The credit term allows debtors some time to pay

back their debts that exposes the business to the
risks that some of the customers may never pay

Bad Debts

Uncollectible amount due by debtors

Some debtors are not able to pay due to death,
being declared a bankrupt, unable to trace etc.

Double entry

Accounts

Debit

Bad Debt

Credit

Acc receivable

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Bad Debts
In

the books of a sole trader on 1

December 2006, it was found that Ali and
Ahmad owed RM300 and RM500
respectively. A few reminders had been
sent to both of them, but they failed to
settle the debts. The sole trader decided
to write off the whole amount as bad debt
on 31 December 2006.

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Bad Debts Recovered

When payment is being received by
debtors whose accounts has been written
off as bad debts
Revenue to the business and recorded in
Income Statement
Effects

Double
entry

Accounts

Increase
Assets
Increase
Revenue

Debit

Cash /Bank

Credit

Bad Debt Recovered a/c

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Bad Debts Recovered

Adjusting

entries to record recovery of bad

debts
Debit

Cash / bank a/c

Credit Bad Debts Recovered a/c

Closing

entries:
Debit Bad Debt Recovered a/c
Credit Income Statement

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General Ledger
Bad Debt Recovered Account
Income statement xx Cash

Cash/Bank Account
Balance b/d
xxx
Bad debt Recovered x

xx

Bad Debts Recovered

A

debtor, Lim, whose account had been written

off as bad paid RM600 by cheque to settle the
amount owing by him on 1 October 2006. The
accounting period ends 31 December 2006.

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Allowance for doubtful debts

The

estimation amount of debtors who might not

be able to settle their debt in the future

The

estimation of allowance for doubtful debt is

made at the end of the accounting year. The
estimation is normally based on business past
experience on their customers and also based on
the economic condition.

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10

Allowance for doubtful debts

Doubtful

debt will be transferred to

SOPL as an estimate bad debt either as
revenue (decrease) or expenses
(increase)

Allowance

for DD (SOFP) will be used to

reduce the amount of existing debtors
for a particular accounting period

Allowance for doubtful debts

In

the 1st accounting period the estimation

amount will be recorded in full as expenses

In

the next accounting period, a

bookkeeper needs to compare the
current estimation with previous
estimation amount and only record the
increase or decrease in Allowance for DD

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12

Doubtful Debts (DD) & Allowance for

doubtful debts
In the first year:
Allowance

for DD c/d = % x
(Debtors/Account Receivable New
Bad Debts and discount allowed at
the end of the year)

The

full amount will be treated as

expenses
Debit Bad Debt a/c
Credit A/c receivables
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13

Doubtful Debts (DD) & Allowance

for doubtful debts
In the following year:
Determine whether there is an increase or decrease
in the allowance for doubtful debt
Amount of allowance for DD for the year before (b/d)
Differences in the amount (increase/decrease)
in allowance for DD
Amount of allowance for DD for this year (c/d)
XXX

XXX
XXX

Doubtful Debts (DD) & Allowance for

doubtful debts
If increase = expenses
Debit DD a/c
Credit Allowance for DD a/c
If

decrease = revenue
Debit Allowance for DD a/c
Credit DD a/c
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Allowance for Doubtful Debts

Year ended 31 Dec

Total Debtor before

bad debt and
discount allowed

Bad debt and discount

allowed during the year

2004

10,500

500

2005

12,400

400

2006

9,600

600

The companys policy for doubtful debt is at the

rate of 2% on the remaining total debtors. Show
the calculation and the records in the provision
for doubtful debt.
16

Final Presentation
SOPL for the year ended..
Add: Revenue
Bad Debts recovered
Less: Expenses
Bad Debts

RM
xxx

xxx

17

Final Presentation
SOFP As At
Current Assets:
Debtors
(-) Allowance for DD
Net Debtor

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c/d

RM
xxx
(xx)
xxx

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