Ch 7 bad debts

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Chapter 7Chapter 7

Bad Debt, Allowances For Doubtful Bad Debt, Allowances For Doubtful Debt & Discount AllowableDebt & Discount Allowable

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Learning objectivesLearning objectives

After completion of this chapter, After completion of this chapter, you should be able to:you should be able to:

Differentiate between bad debts & doubtful Differentiate between bad debts & doubtful debtsdebts

Differentiate between discounts allowed & Differentiate between discounts allowed & discount allowablediscount allowable

Make adjustments on debtors for bad debt Make adjustments on debtors for bad debt expenses & bad debt recoveredexpenses & bad debt recovered

Calculate & record allowances for doubtful Calculate & record allowances for doubtful debt & discount allowabledebt & discount allowable

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IntroductionIntroduction

Most of the business’ sales are on credit Most of the business’ sales are on credit basis that is giving some time ( normally basis that is giving some time ( normally one to three months) for the debtors to pay one to three months) for the debtors to pay back.back.

Therefore, the business is taking the risks Therefore, the business is taking the risks that some of the customers may never pay that some of the customers may never pay for the goods sold @ services given to for the goods sold @ services given to them.them.

So, business has to make adjustments on So, business has to make adjustments on debtors for bad debt expense, bad debt debtors for bad debt expense, bad debt recovered, provision for doubtful debt & recovered, provision for doubtful debt & provision for discount allowable.provision for discount allowable.

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BAD DEBTBAD DEBT If the debtors couldn’t settle the debt, the If the debtors couldn’t settle the debt, the

amount that cannot be recovered from the amount that cannot be recovered from the debtors is known as bad debt.debtors is known as bad debt.

Therefore, it must be deducted from the debtor Therefore, it must be deducted from the debtor account.account.

Bad debt is considered as an expense to the Bad debt is considered as an expense to the business and will be recorded in the Profit & business and will be recorded in the Profit & Loss account. Loss account.

Journal entries:Journal entries: Dr.Dr. Cr.Cr.

a) To record bad debt written a) To record bad debt written off from debtorsoff from debtors

Bad DebtBad Debt DebtorsDebtors

b) To close the bad debt b) To close the bad debt expense to the Profit & expense to the Profit & Loss at the end of the Loss at the end of the accounting period.accounting period.

Profit and Profit and LossLoss

Bad Bad debtdebt

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BAD DEBT (Cont’d)BAD DEBT (Cont’d)

ExampleExampleBelow the balances in the debtor account of Blossom Florist Ltd. as at 31 December 2005.Below the balances in the debtor account of Blossom Florist Ltd. as at 31 December 2005.

Show the journal entries & the appropriate adjustment for bad debt in the ledger account.Show the journal entries & the appropriate adjustment for bad debt in the ledger account.

DebtorsDebtors Amount due as at Amount due as at 1 Jan 20051 Jan 2005

Amount written off as Amount written off as bad debt bad debt

on 31 Dec 2005on 31 Dec 2005

AhmadAhmad RM 2,700RM 2,700 RM300RM300

AwangAwang RM 430RM 430 RM430RM430

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Debtor – Ahmad

1-Jan Bal b/d 2,700 31-Dec Bad debt 300

“ Bal c/d 2,400

2,700 2,700

Debtor – Awang

1-Jan Bal b/d 430 31-Dec Bad debt 430


a) To record bad debt written off from a) To record bad debt written off from debtors- Ahmad & Awang RM 730 debtors- Ahmad & Awang RM 730 on Dec 3, 2005on Dec 3, 2005

Bad Bad DebtDebt

Ahmad Ahmad

AwangAwang

b) To close the bad debt expense to b) To close the bad debt expense to the Profit & Loss RM730 on Dec the Profit & Loss RM730 on Dec 31, 200531, 2005

Profit Profit and and LossLoss

Bad Bad debtdebt

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Profit and Loss

Expense

Bad Debt 730

Balance Sheet as at 31 Dec 2005

Current Assets

Debtor - Ahmad 2,400

Bad Debt

31-Dec

Debtor - Ahmad 300 31-Dec

Profit and Loss 730

“ Debtor - Awang 430

730 730

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BAD DEBT RECOVEREDBAD DEBT RECOVERED When payment is being received by a debtor whose account When payment is being received by a debtor whose account

has been written off as bad debt, it is said that the bad debt has has been written off as bad debt, it is said that the bad debt has been recovered.been recovered.

There are 2 methods of Recording Bad Debt Recovered:There are 2 methods of Recording Bad Debt Recovered:

Method 1:Method 1:

Journal entriesJournal entries Dr.Dr. Cr.Cr.

a) To record the recovery of a) To record the recovery of bad debtbad debt

Cash / Cash / BankBank

Bad Debts Bad Debts

RecoveredRecovered

b) To close the Bad Debts b) To close the Bad Debts Recovery to Profit and Loss Recovery to Profit and Loss accountaccount

Bad Debts Bad Debts RecoveredRecovered


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a) To record the recovery of a) To record the recovery of bad debt in the debtor’s a/cbad debt in the debtor’s a/c

DebtorsDebtors Bad Debt Bad Debt RecoveredRecovered

b) To record the payment b) To record the payment made by the debtorsmade by the debtors

Cash / Cash / BankBank

DebtorsDebtors

C) To close the Bad Debt C) To close the Bad Debt Recovered to Profit and Recovered to Profit and Loss accountLoss account

Bad Debt Bad Debt RecoveredRecovered


BAD DEBT RECOVERED (Cont’d)BAD DEBT RECOVERED (Cont’d)

Method 2:Method 2:

Example:A debtor, Jane whose account had been written off as bad debt paid RM700 by cheque to settle the amount owing by her on 1 October 2005. The accounting period ends 31 December 2005.

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a) To record the recovery of bad a) To record the recovery of bad debt RM700debt RM700

Cash / BankCash / Bank Bad Debts Bad Debts

RecoveredRecovered

b) To close the Bad Debts Recovery b) To close the Bad Debts Recovery to Profit and Loss account to Profit and Loss account RM700RM700

Bad Debts Bad Debts RecoveredRecovered


Bad Debt Recovered

31-Dec Profit & Loss 700 1-Oct Bank 700

Bank

1-Oct Bad Debt 700

Recovered

Method 1:Method 1:

Profit and Loss for the year ended 31 Dec 2005

Revenues

Bad Debt Recovered 700

1111


a)a) To record the recovery of To record the recovery of bad debt in the debtor’s a/c bad debt in the debtor’s a/c RM 700RM 700

Debtors - Debtors - JaneJane


b)b) To record the payment To record the payment made by the debtors made by the debtors RM700RM700

Cash / BankCash / Bank DebtorsDebtors

c)c) To close the Bad Debt To close the Bad Debt Recovered to Profit and Recovered to Profit and Loss account RM700Loss account RM700



Method 2:Method 2:


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Bank

1-Oct Debtor - 700

Jane

Profit and Loss for the year ended 31 Dec 2005

Revenues

Bad Debt Recovered 700


Bad Debt Recovered

31-DecProfit & Loss 700 1-Oct

Debtor - Jane 700

Debtor - Jane

1-OctBad Debt Recovered 700 1-Oct Bank 700

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ALLOWANCE FOR DOUBTFUL DEBTALLOWANCE FOR DOUBTFUL DEBT

Estimation should be made as to the amount that Estimation should be made as to the amount that will not be collectable. ( Doubtful Debt)will not be collectable. ( Doubtful Debt)

Methods used in estimating doubtful debt is the Methods used in estimating doubtful debt is the percentage of debtor method.percentage of debtor method.

Debts that cannot be collected within one year Debts that cannot be collected within one year should not be considered as current assets. should not be considered as current assets.

Therefore, certain amounts need to be reduced Therefore, certain amounts need to be reduced from the existing debtors who are part of the current from the existing debtors who are part of the current assets.assets.

11stst actg period, doubtful debt will be recorded in full, actg period, doubtful debt will be recorded in full, next actg period & the following period only the next actg period & the following period only the increase & decrease in allowance for doubtful debt increase & decrease in allowance for doubtful debt should be recorded.should be recorded.

Allowance for Doubtful Debt Allowance for Doubtful Debt

= Total Debtors (after deducting bad debts) x %= Total Debtors (after deducting bad debts) x %

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ALLOWANCE FOR DOUBTFUL DEBT ALLOWANCE FOR DOUBTFUL DEBT (cont’d)(cont’d)


a) To record the increase in a) To record the increase in doubtful debt doubtful debt

(opening bal < ending bal)(opening bal < ending bal)

Doubtful Doubtful DebtDebt

Allowance Allowance for for Doubtful Doubtful DebtDebt

b) To transfer the doubtful b) To transfer the doubtful debt to Profit & Loss a/c at debt to Profit & Loss a/c at the end of actg periodthe end of actg period

Profit & Profit & LossLoss


c) To record the decrease in c) To record the decrease in doubtful debtdoubtful debt

(opening bal >ending bal)(opening bal >ending bal)

Allowance Allowance for for Doubtful Doubtful DebtDebt


d) To close doubtful debt a/c d) To close doubtful debt a/c at the end of actg periodat the end of actg period


Profit & Profit & LossLoss

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Business will try to recognise all possible losses but Business will try to recognise all possible losses but will not recognize profit until it is earned.will not recognize profit until it is earned.

Business may want to estimate the amount of Business may want to estimate the amount of discount that may be allowed to customers who discount that may be allowed to customers who may pay within the discount period. ( Discount may pay within the discount period. ( Discount allowable)allowable)

11stst actg period, discount allowable will be recorded actg period, discount allowable will be recorded in full, next actg period & the following period only in full, next actg period & the following period only the increase & decrease in allowance for discount the increase & decrease in allowance for discount allowable.allowable.

ALLOWANCE FOR DISCOUNT ALLOWANCE FOR DISCOUNT ALLOWABLE (cont’d)ALLOWABLE (cont’d)

All. for Discount Allowable All. for Discount Allowable = (Total Debtors – All. For Doubtful Debt) x %= (Total Debtors – All. For Doubtful Debt) x %

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a) To record the increase in a) To record the increase in provision for discount provision for discount allowableallowable

Discount Discount AllowableAllowable

Allowance Allowance for Discount for Discount AllowableAllowable

b) To close discount b) To close discount allowableallowable

Profit & LossProfit & Loss Discount Discount AllowableAllowable

c) To record the decrease c) To record the decrease in provision for discount in provision for discount allowableallowable

Allowance Allowance for Discount for Discount AllowableAllowable


d) To close discount d) To close discount allowableallowable


Profit & LossProfit & Loss

e) Discount allowable is e) Discount allowable is different from discount different from discount allowed.allowed.

Discount Discount AllowedAllowed

DebtorsDebtors

ALLOWANCE FOR DISCOUNT ALLOWANCE FOR DISCOUNT ALLOWABLE (cont’d)ALLOWABLE (cont’d)

Documents

Ch 7 bad debts