Ch 7 bad debts

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Ch 7 bad debts

  1. 1. Chapter 7Bad Debt, Allowances For Doubtful Debt & Discount Allowable 1
  2. 2. Learning objectivesAfter completion of this chapter,you should be able to:  Differentiate between bad debts & doubtful debts  Differentiate between discounts allowed & discount allowable  Make adjustments on debtors for bad debt expenses & bad debt recovered  Calculate & record allowances for doubtful debt & discount allowable 2
  3. 3. Introduction Most of the business’ sales are on credit basis that is giving some time ( normally one to three months) for the debtors to pay back. Therefore, the business is taking the risks that some of the customers may never pay for the goods sold @ services given to them. So, business has to make adjustments on debtors for bad debt expense, bad debt recovered, provision for doubtful debt & provision for discount allowable. 3
  4. 4. BAD DEBT If the debtors couldn’t settle the debt, the amount that cannot be recovered from the debtors is known as bad debt. Therefore, it must be deducted from the debtor account. Bad debt is considered as an expense to the business and will be recorded in the Profit & Loss account. Journal entries: Dr. Cr. a) To record bad debt written Bad Debt Debtors off from debtors b) To close the bad debt Profit and Bad expense to the Profit & Loss debt Loss at the end of the accounting period. 4
  5. 5. BAD DEBT (Cont’d)ExampleBelow the balances in the debtor account of BlossomFlorist Ltd. as at 31 December 2005. Amount written off asDebtors Amount due as at bad debt 1 Jan 2005 on 31 Dec 2005 Ahmad RM 2,700 RM300 Awang RM 430 RM430Show the journal entries & the appropriate adjustmentfor bad debt in the ledger account. 5
  6. 6. BAD DEBT (Cont’d)Journal entries: Dr. Cr.a) To record bad debt written off from Bad Ahmad debtors- Ahmad & Awang RM 730 Debt Awang on Dec 3, 2005b) To close the bad debt expense to Profit Bad the Profit & Loss RM730 on Dec and debt 31, 2005 Loss Debtor – Ahmad 1-Jan Bal b/d 2,700 31-Dec Bad debt 300 “ Bal c/d 2,400 2,700 2,700 Debtor – Awang 1-Jan Bal b/d 430 31-Dec Bad debt 430 6
  7. 7. BAD DEBT (Cont’d) Bad Debt Debtor - Profit and 31-Dec Ahmad 300 31-Dec Loss 730 Debtor - “ Awang 430 730 730 Profit and LossExpenseBad Debt 730 Balance Sheet as at 31 Dec 2005Current Assets Debtor - Ahmad 2,400 7
  8. 8. BAD DEBT RECOVERED  When payment is being received by a debtor whose account has been written off as bad debt, it is said that the bad debt has been recovered.  There are 2 methods of Recording Bad Debt Recovered: Method 1:Journal entries Dr. Cr.a) To record the recovery of Cash / Bad Debts bad debt Bank Recoveredb) To close the Bad Debts Bad Debts Profit and Recovery to Profit and Loss Recovered Loss account 8
  9. 9. BAD DEBT RECOVERED (Cont’d)Method 2:Journal entries Dr. Cr.a) To record the recovery of Debtors Bad Debt bad debt in the debtor’s a/c Recoveredb) To record the payment Cash / Debtors made by the debtors BankC) To close the Bad Debt Bad Debt Profit and Recovered to Profit and Recovered Loss Loss accountExample:A debtor, Jane whose account had been written off asbad debt paid RM700 by cheque to settle the amountowing by her on 1 October 2005. The accounting periodends 31 December 2005. 9
  10. 10. BAD DEBT RECOVERED (Cont’d)Method 1:Journal entries Dr. Cr.a) To record the recovery of bad Cash / Bank Bad Debts debt RM700 Recoveredb) To close the Bad Debts Recovery Bad Debts Profit and to Profit and Loss account Recovered Loss RM700 Bad Debt Recovered 31-Dec Profit & Loss 700 1-Oct Bank 700 Bank 1-Oct Bad Debt 700 Recovered Profit and Loss for the year ended 31 Dec 2005 Revenues Bad Debt Recovered 700 10
  11. 11. BAD DEBT RECOVERED (Cont’d)Method 2:Journal entries Dr. Cr.a) To record the recovery of Debtors - Bad Debt bad debt in the debtor’s a/c Jane Recovered RM 700b) To record the payment Cash / Bank Debtors made by the debtors RM700c) To close the Bad Debt Bad Debt Profit and Recovered to Profit and Recovered Loss Loss account RM700 11
  12. 12. BAD DEBT RECOVERED (Cont’d) Debtor - Jane Bad Debt1-Oct Recovered 700 1-Oct Bank 700 Bad Debt Recovered Profit & Debtor - 31-Dec Loss 700 1-Oct Jane 700 Bank 1-Oct Debtor - 700 Jane Profit and Loss for the year ended 31 Dec 2005 Revenues Bad Debt Recovered 700 12
  13. 13. ALLOWANCE FOR DOUBTFUL DEBT Estimation should be made as to the amount that will not be collectable. ( Doubtful Debt) Methods used in estimating doubtful debt is the percentage of debtor method. Debts that cannot be collected within one year should not be considered as current assets. Therefore, certain amounts need to be reduced from the existing debtors who are part of the current assets. 1st actg period, doubtful debt will be recorded in full, next actg period & the following period only the increase & decrease in allowance for doubtful debt should be recorded. Allowance for Doubtful Debt = Total Debtors (after deducting bad debts) x % 13
  14. 14. ALLOWANCE FOR DOUBTFUL DEBT (cont’d)Journal entries: Dr. Cr.a) To record the increase in Doubtful Allowance doubtful debt Debt for (opening bal < ending bal) Doubtful Debtb) To transfer the doubtful Profit & Doubtful debt to Profit & Loss a/c at Loss Debt the end of actg periodc) To record the decrease in Allowance Doubtful doubtful debt for Debt (opening bal >ending bal) Doubtful Debtd) To close doubtful debt a/c Doubtful Profit & at the end of actg period Debt Loss 14
  15. 15. ALLOWANCE FOR DISCOUNT ALLOWABLE (cont’d) Business will try to recognise all possible losses but will not recognize profit until it is earned. Business may want to estimate the amount of discount that may be allowed to customers who may pay within the discount period. ( Discount allowable) 1st actg period, discount allowable will be recorded in full, next actg period & the following period only the increase & decrease in allowance for discount allowable. All. for Discount Allowable = (Total Debtors – All. For Doubtful Debt) x % 15
  16. 16. ALLOWANCE FOR DISCOUNT ALLOWABLE (cont’d)Journal entries: Dr. Cr.a) To record the increase in Discount Allowance provision for discount Allowable for Discount allowable Allowableb) To close discount Profit & Loss Discount allowable Allowablec) To record the decrease Allowance Discount in provision for discount for Discount Allowable allowable Allowabled) To close discount Discount Profit & Loss allowable Allowablee) Discount allowable is Discount Debtors different from discount Allowed allowed. 16

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