BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS

Reasons why a provision for doubtful debts is made at the financial year end:-

-          possible bad debts are charged to Profit & Loss Account

-          a more realistic debtors’ figure are shown in the Balance Sheet

 

There are two elements to the Provision for Doubtful Debts:-

1)      A specific provision

 

For balances of individual customer account who is unlikely to pay up.

 

2)      A general provision

 

For the remaining balances of customers account of whom the company is uncertain if they

              will pay up.

 

Example

Company A has a total of debtors of RM29,555 on 30 April 20x3.

From this total debtors,

 

Customer                                            Balance (RM)                                     Comment

Kingsley                                                        560                                                Debts unlikely to be recovered

Bott                                                               1,495                                             Debts unlikely to be recovered

Others                                                     27,500                                                No certainty (2% as general provision)       

 

Therefore, the provision for doubtful debts will be:-

 

1) Specific Provision
Kingsley			RM560
Bott			RM1,495
2) General Provision
2%  x  RM27,500		=	RM550
			RM2,605

 

				Provision for Doubtful Debts Account
Balance c/d				2,605			Profit & Loss Account				2,605
				Extract of Profit & Loss Account for the year ended …
Expenses
Prov for Doubtful
Debts				2,605
				Extract of Balance Sheet as at …
Current Assets
Debtors				29,555
Less: Prov for
Doubtful Debts				(2605)
				26,950

 

 

 

Changes in the provision for doubtful debts

There may be an increase or decrease in the total provision for doubtful debts from year to year.

The profit & loss account will be credited if there is a decrease in the provision.

However, profit & loss account will be debited if there is an increase in the provision.

Additional summary notes

1)      Bad Debts

 

The effect is that it is an expense in the Profit & Loss Account and a reduction in the Debtors’ Account.

 

2)      Provision for doubtful debts

 

It is an estimation by the company that the debtors of certain percentage in general will not be paying up.

 

 

3)      Specific provision

 

Relates to individual debtors balances expected not to be able to collect.

 

4)      General provision

 

Relates to the balance of debtors that the company believes may not be collected.

 

5)      Others

An increase in the provision for doubtful debts is an expense in the Profit & Loss Account and a decrease in the

provision for doubtful debts is an income in the profit & loss account.

 

6)      The provision for doubtful debt is netted off against the debtors on the balance sheet.

                

 

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