Bad Debts And Doubtful Debts SS2 Book Keeping Lesson Note

PROVISION FOR DOUBTFUL DEBTS

Although a debt may not have become bad, there may be doubt as to whether it will be paid.  It would be misleading to include that debt as an asset in the balance sheet pretending that the amount is not in doubt.  On the other hand, since it has not yet become bad, it would be wrong to write it off.  A provision is therefore made to cover such doubtful debt.

Provision for doubtful debt is a mere estimate of the total debt that may not be collected from the debtor.  This estimated expense for bad debts which cannot be calculated with substantial accuracy is charged to the profit and loss account as an expense.

HOW TO CREATE AND MAINTAIN A PROVISION FOR DOUBTFUL DEBTS

1. When the provision for doubtful debt is first created;

Debit         Profit and Loss Account

Credit         Profit for doubtful debts Account with the full amount of the provision

2. In the years that follow, the entries in the accounts will be for increases or decreases in the amounts required for the provision.

INCREASING THE PROVISION FOR DOUBTFUL DEBTS 

Debit        Profit and Loss Account

Credit         Profit for doubtful debts Account with increases in the provision.

DECREASING THE PROVISION FOR DOUBTFUL DEBTS

Debit         Profit for doubtful debts Account

Credit         Profit and Loss Account with decreases in the provision.

In all the instances (A-C) as described above, the provision for Doubtful Debts is deducted from the Debtors in the Balance Sheet.

ADJUSTMENTS OF THE FINAL ACCOUNT

Adjustments are closing entries or amendments made in the books of accounts at the end of the accounting period to achieve a proper matching of costs and expenses with revenue.

Adjustments are required for the following:

1. Accruals
2. Prepayments
3. Depreciation of fixed assets
4. Provision for doubtful debts
5. Provision for discounts on debtors
6. Bad debts
7. Closing stock
8. Capital and revenue items of income and expenditure.
9. Set-offs
10. Correction of errors e.g. errors of omissions, errors of principle, casting errors etc.
11. Provision for contingencies e.g. legal charges, and accountancy charges.

ASSIGNMENT 

1. List any five items that may cause adjustments in final accounts.
2. Outline any four factors that may make a debt irrecoverable.