Bad Debts

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Paper F3, Financial Accounting Lecture by: Miss Atiqa Rehman

BAD DEBTS (RECEIVABLE EXPENSE)

Prudence Concept:

• Recorded as an expense as soon as the expense incurred whether paid or not.


• It is deducted from the Capital.
• Profit should not be overcastted.

Expenses Income
• Income should not be overstated
• Expenses should not be understated
• Income should not be recorded until recognized
• Expenses should be recorded as anticipated
certain

Bad Debts:

Debtors that are no longer to be recoverable is mentioned as “Bad Debts Written Off”

Recording:

Dr. Bad Debt/Receivable Expense xxx


Cr. Debtors xxx

Reasons for Recording:

• In case of death of a debtor


• Debtors gone Bankrupts
• Debtors migration from country
• Debtor ceased trading
• No chance of liquidation for the debtors business

Bad Debts Recovered:

Case 1 Case 2
Bad debt recovered in same accounting period. Bad debts recovered in next accounting period.
Step 1: Cancellation of Bad Debt Recorded
Dr. Debtors
Step 1: Recorded as Income
Cr. Bad Debts
Dr. Cash
Step 2: Cash received from Debtors
Cr. Bad Debt Recovered
Dr. Cash
Cr. Debtors

ALLOWANCES FOR RECEIVABLES / PROVISION FOR DOUBTFUL DEBTS

An estimate based on past experience for doubtful debts is called “Allowances for Receivables” or “Provision for
Doubtful debts”.

Recording:

Dr. Receivable Expense / Bad Debts xxx


Cr. Allowances for Receivables xxx
1-Page | 29th of April 2011 Prepared by: Mani Shah

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Paper F3, Financial Accounting Lecture by: Miss Atiqa Rehman

Allowances are deducted from Receivables in Balance Sheet

e.g.,

Balance Sheet

Cash Account
Receivables xxx
(-) Allowances (xx)

Net Receivables xxx

Increase in Allowances Decrease in Allowances


Dr. Receivable Expense xxx Dr. Allowance for Receivables xxx
Cr. Allowance for Receivables xxx Cr. Receivable Expense xxx

Increase Decrease
Dr. Receivable Expense Dr. Receivable Expense
Cr. Debtors Cr. Debtors

Dr. Cash Dr. Cash


Cr. Bad Debt Recovered Cr. Bad Debt Recovered

Dr. Receivable Expense Dr. Allowance for Receivables


Cr. Allowance for Receivables Cr. Receivable Expense

Receivable Expense (if Allowance


increased) Debtors
Debtors c/d - Income o/b Receivable Cash
Statement as Expense o/b
Allowances Expense
c/d Bad Debt
Recovered c/d

Bad Debt Recovered


Cash Allowances (in case of Increase)
c/d - Income o/b
Statement as
Income Receivable
c/d Expense

Receivable Expense (if Allowance


decreased)
Debtors Allowances Allowances (in case of decrease)
Receivable o/b
c/d - Income Expense
Statement as
Expense
c/d

2-Page | 29th of April 2011 Prepared by: Mani Shah

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Paper F3, Financial Accounting Lecture by: Miss Atiqa Rehman

Types of Allowances:

• Specific Allowance
o For a specific person e.g., Richard owes $5000

• General Allowance
o Overall estimate e.g., 5% of Receivables

General Allowance = {c/d of Total Receivables – Specific Allowance} x %age of General Allowance

3-Page | 29th of April 2011 Prepared by: Mani Shah

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