Bad Debts
Bad Debts
Bad Debts
Prudence Concept:
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:
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
An estimate based on past experience for doubtful debts is called “Allowances for Receivables” or “Provision for
Doubtful debts”.
Recording:
e.g.,
Balance Sheet
Cash Account
Receivables xxx
(-) Allowances (xx)
Increase Decrease
Dr. Receivable Expense Dr. Receivable Expense
Cr. Debtors Cr. Debtors
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