Bad Debts Provisions For Doubtful Debts And Discounts On Debtors:

At the end of the year, after deducting bad debts, provision for doubtful debts is created for possible irrecoverable amount and discount may also be allowed to debtors for quick recovery.

Let's go through it one after another. It's all about Sundry Debtors

Bad Debts:

Bad debt is the amount of irrecoverable money receivable or claim against a debtor. The amount of bad debt is treated as normal business expenses and is transferred to profit and loss account. The amount of bad debt is written off immediately at the end of the financial period.

Accounting Entry For Bad Debts:

Bad Debts A/c ---------------------- Dr.

   To Concerned Debtor A/c

(Being the amount of Bad Debt written off.)

Accounting Entry For Recovery Of Bad Debts:

Cash A/c ---------------------- Dr.

   To Bad Debts A/c.

(Being the amount of Bad Debt written earlier now recovered.)

For Transferring of Bad Debts to Profit and Loss Account at the End of the year.

Profit & Loss A/c --------------------Dr.

   To Bad Debts A/c

(Being the amount of Bad Debts transferred to Profit and Loss A/c.)

Provision For Doubtful Debts:

After writing off the amount of bad debts, at the close of the financial year, there may still be some amount of debts that may be irrecoverable. It cannot be treated as bad debts as because non-recovery of such amount is not certain. Also prudence requires that the amount of receivable should be brought down to its net realizable figure so that balance sheet may exhibit the debtors at their actual realizable value.

Therefore, to show the approximately true value of the sundry debtors in the balance sheet a provision or reserve is created for possible bad debts. Such an adjustment entry is recorded at the end of accounting year.

Provision for bad debts is an attempt to anticipate possible losses due to bad debts and to keep aside an amount out of profit to meet the loss estimated in the following years.

Accounting Entry For Provision For Doubtful Debts:

Profit & Loss A/c--------------------Dr.

   To Provision for Bad Debts A/c.

(Being the amount of bad debts provision transferred to profit and loss account)

Accounting Entry For Increase In The Provision For Bad Debt:

Profit & Loss A/c--------------------Dr. (with the amount increased)

   To Provision for Bad Debts A/c.

(Being the increased amount of bad debts provision transferred to profit and loss account)

Accounting Entry For Decrease In The Provision For Bad Debt:

Provision For Bad Debt A/c--------------------Dr.

   To Profit & loss A/c

(Being indirect income earned from decrease in the amount of bad debts provision transferred to profit and loss account)

Note:

While preparing the balance sheet, always the new provision for bad debt is deducted from the amount of debtors.

Recovery of Bad Debts:

Sometime, a bad debt previously written off may be subsequently settled in full or in part. In such case, it becomes necessary to cancel the effect of bad debt expense previously recognized up to the amount settlement. The amount of bad debts recovered in full or part is treated as income for the concern and is transferred to profit and loss account.

Accounting Entry For Full Recovery Of Bad Debts: 1. Accounting Entry For Recovery Of Bad Debts:

Cash /Bank A/c--------------------Dr.

   To Bad Debts A/c

(Being the amount of bad debts recovered)

2. For Transferring The Amount Of Bad Debts To Profit and Loss Account:

Bad Debts A/c--------------------Dr.

   To Profit and Loss A/c

(Being the amount of bad debts recovered transferred to Profit and Loss Account)

Accounting Entry For Partial Settlement of Debtors:

Sometimes, a business might only be able to recover a part of the debts. This means the rest of the unrecovered debts will be written off as bad debts.

Accounting Entry For Partial Recovery Of Bad Debts:

Cash A/c--------------------Dr.

Bad Debts A/c--------------------Dr.

   To Debtor's Account

(Being partial recovery of debts recorded and the amount of bad debts suffered deducted from debtor's account)

Estimating Bad And Doubtful Debts:

To estimate the amount of possible bad debts or doubtful debts, any one of the following methods may be used:

  1. Bad debts may be estimated as a percentage of total sales during the year. The methods can be used only when there are no cash sales or such sales are negligible.
  2. Bad debts may be estimated as a percentage of credit sales
  3. Bad debts may be estimated as a percentage of receivables outstanding at the end of the accounting period.

The percentage will be based on the judgment of the management and the past experience with regard to bad debts.

Another logical way to estimate bad debts would be to draw up an aging schedule for the outstanding debtors and apply different percentages for the amounts outstanding for various lengths of time.

Provision of Discount on Amount Payable:

Provisions may be made to show the amount payable to Sundry Creditors at the net payable value after deducting the amount of advance receivable at the time of settlement of amount due.

This is normally done by creating a reserve for discount on creditors and then transferring the discount received to such reserve.

Journal Entries For Provision of Discount on Amount Payable:

The following journal entries may be passed for recognizing in advance such discount receivable as income

Receive For Discount on Accounts Payable A/c --------Dr.

   To Profit And Loss A/c (with the estimated amount of discount receivable)

Provision for Discount On Debtors:

Simply, a debtor is a person from whom we are supposed to get money.

In business, debtor arises due credit sale of goods and services which is a very common feature of business transactions. In accounting, debtor is a term used to describe a person or organization that owes money to another person or organization. This means that a debtor is said to be an entity that has a legal obligation to pay to another entity.

At the close of the accounting period we find that amounts are receivable from debtors. Now for prompt recovery of the amount receivable cash discounts are allowed to debtors for settlement of their accounts within the stipulated time. It is an anticipated loss that a firm bears for quick recovery of amount receivables.

Accounting Entries For Provision for Discount on Debtors:

Discount is allowed only to the good debtors and the provision is calculated after deducting the provision of doubtful debts.

Journal Entry for Creating a Provision for Discount on Debtors:

Profit & Loss A/c ------Dr.

   To Provision for Discount on Debtors A/c

(Being the amount of provision created for discount payable)

When discount Is Allowed To Debtors:

Discount A/c ---- Dr.

   To, Debtors A/c

(Being discount allowed to debtors)