Frank Wood*s Business Accounting 1 Twelfth Edition

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Slide 25.1
Chapter 25
Bad debts, allowances for doubtful
debts, and provisions for discounts
on accounts receivable
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.2
Learning objectives
After you have studied this chapter, you
should be able to:
 Explain and show how bad debts are
written-off
 Explain why allowances for doubtful debts
are made
 Make the necessary entries to record an
allowance for doubtful debts in the books
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.3
Learning objectives (Continued)
 Calculate
and make provisions for
discounts on accounts receivable
 Make all the entries in the income
statement and statement of financial
position for bad debts, allowances for
doubtful debts and provisions for cash
discount
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.4
Bad debts
 Many
businesses sell on credit and there
is therefore a risk that some customers will
not pay for their goods and become a bad
debt.
 When a debt is considered bad, the asset
shown in the debtor’s account is worthless
and so eliminated.
 Bad debts are considered a business
expense and are charged to the income
statement as an expense.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.5
Recording a bad debt
 Credit
the debtor’s account to remove the
debt.
 Debit the bad debt account to increase the
expense.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.6
Recording a bad debt
(Continued)
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.7
Allowance for doubtful debts

It is likely that some debts held by the business
will prove to be bad debts.
 The prudence concept says that this possibility
needs to be provided for in the current period.
 Therefore an allowance needs to be made in
the current period for debts that might be bad
by: debiting the p+l account with the allowance
Crediting the allowance for doubtful debts
account.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.8
Creating an allowance for
doubtful debts
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.9
Increasing the allowance
To increase the allowance:
 Debit the profit and loss account with the
increase in the allowance.
 Credit the allowance for doubtful debts
account.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.10
Increasing the allowance
(Continued)
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.11
Reducing the allowance
To reduce the allowance:
 Debit the allowance for doubtful debts
account.
 Credit the profit and loss account.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.12
Reducing the allowance
(Continued)
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.13
Provisions for cash discounts
on accounts receivable
 Some
businesses create provisions for
cash discounts to be allowed on the
accounts receivable outstanding at year
end.
 It is argued that the cost of discounts
should be charged in the period when the
sales were made.
 The procedure used is similar to that used
for the allowance for doubtful debts.
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.14
How to record provisions
for cash discounts
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.15
Learning outcomes
You should have now learnt:
1. That debts we are unable to collect are
called bad debts
2. That bad debts are credited to the
customer’s account (to cancel them) and
debited to a bad debts account
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.16
Learning outcomes (Continued)
3.
That allowances for doubtful debts are
needed, otherwise the value of the
accounts receivable in the statement of
financial position will show too high a
value, and could mislead anyone looking
at the statement of financial position. Also,
making a provision of this type allows for
more accurate calculation of profits and
losses
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.17
Learning outcomes (Continued)
4. That
the allowance for doubtful debts is
calculated after bad debts have been
deducted from the debtor balances
5. That the amount of the allowance for
doubtful debts is based on the best
estimate that can be made taking all the
facts into account
6. That an increase in the allowance for
doubtful debts will create a debit entry in
the profit and loss account
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.18
Learning outcomes (Continued)
7.
8.
9.
That a reduction in the allowance for
doubtful debts will create a credit entry in
the profit and loss account
That the allowance for doubtful debts is
shown as a deduction from accounts
receivable in the statement of financial
position
That provisions for cash discounts are
made in the same way as provisions for
doubtful debts
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 25.19
Learning outcomes (Continued)
10. How to record bad debts, allowances for
doubtful debts and provisions for cash
discounts in the accounting books and in
the income statement and statement of
financial position
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
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