LESSON
GRADE 11
52
WEEK 14 - Lesson 12 of 28
PARTNERSHIP
FINANCIAL STATEMENTS
Summary of the year - end adjustments
Bad debts, Bad debts recovered and Provision for bad debts
The debtors control account reflects the total amount owed by all the individual debtors. In
practice it may be difficult to collect the money owing by some of the debtors and the
business must take action against such debtors.
Action taken by business
Legal action
Write off the debt
Legal costs are expensive
Write off insignificant debts to
minimise legal costs
Entries made to write off the debt
Account debited
Account credited
Journal
Effect on equation
Bad debts
Debtors Control
General Journal


Bad debts will reduce Equity
Debtors Control will reduce Assets
Note: The owner of the business or senior personnel must authorise the bad debts to be written off.
Keep in mind that the business will continue to pursue the debtor for payment of
the amount written off.
Entries involved when the bad debt is recovered
Account debited
Account credited
Journal
Effect on equation
Bank account
Bad debts recovered
CRJ


Bank will increase Assets
Bad debts recovered will
increase Equity (Profits)
Note: The recovered bad debt will not affect the Debtors control, it is regarded as income account.
52 Accounting Grade 11 - CAPS
1
PROVISION FOR BAD DEBTS




After the process of identifying and writing off the bad debts, the business might have the
debtors who will be doubtful payers in future.
The business may not be able to specifically identify them, but will have to provide for
doubtful debts.
The doubtful debt might have passed the settlement date and efforts to collect the money
have failed, bad debts might truly be reflected as bad debts the next financial year.
The accountant or owner(s) of the business normally use the past history as well as
collection patterns to estimate the percentage of doubtful debtors.
Provision for bad debts
from debtors.
- is an allowance for reduction of money expected to be received
The provision is provided for the doubtful debts at the end of the accounting period to avoid
reflecting inaccurate figure for Debtors.
GAAP Concept
Prudence –Provide for doubtful debts, if there’s no certainty that the money will be received
in full. It is better to understate than to overstate the profits.
CREATION OF PROVISION FOR BAD DEBTS
Let’s do an exercise together
On 28 February 2011 the Debtors control in the general ledger of Rexel Traders amounted to
R50 000.The business decided to create a provision for bad debts equals to 5% of total
debtors.
Solution
GENERAL JOURNAL OF REXEL TRADERS: 28 FEBRUARY 2011
Doc
JV
Date Details
28
Provision for bad debts adjustment
Provision for bad debts
Creation of bad debts at 5% of debtors
Profit and loss
Provision for bad debts adjustment
Closing transfer
Provision
Fol Debit
Credit
2 500
2 500
2 500
2 500
50 000 X 5/100 = 2 500
52 Accounting Grade 11 - CAPS
2
GENERAL LEDGER OF REXEL TRADERS
Balance Sheet Accounts Section
Dr
2011
Feb
DEBTORS CONTROL
28
b/d
Balance
Dr
B9
Cr
B10
Cr
50 000
PROVISION FOR BAD DEBTS
2011
Feb
28
Provision for bad
debts adjustment
GJ
2 500
Nominal Accounts Section
Dr
2011
Feb
PROVISION FOR BAD DEBTS ADJUSTMENT
28
Provision for bad
GJ
2 500
2011
28
Profit and loss
N11
GJ
Cr
2 500
Feb
debts
Final Accounts Section
Dr
2011
Feb
PROFIT AND LOSS
28
Provision for bad
GJ
F2
Cr
2 500
Debts adjustment
EXTRACT FROM THE BALANCE SHEET OF REXEL TRADERS ON 28 FEBRUARY 2011
Current assets
Inventories
xxx
Trade and other receivables
47 500
Cash and cash equivalents
xxx
NOTES TO THE FINANCIAL STATEMENTS
Net trade debtors
Trade debtors
Provision for bad debts
Income receivable or accrued
Expenses prepaid
47 500
50 000
(2 500)
xxx
xxx
Provision for bad debts is a negative asset
EFFECT OF THE TRANSACTIONS ON THE ACCOUNTING EQUATION
Account Debited
Account credited Assets
Owner’s Liabilities
Equity
Provision for bad
Provision for bad
-2 500
-2 500
0
debts adjustment
debts
52 Accounting Grade 11 - CAPS
3
Important information a business should possess in order to qualify for an allowance
/deduction when providing for bad debts
 The business credit policy, indicating terms of payments. These must be written into all of your
agreements and onto your invoices.
 Actions you take to collect outstanding amounts (e.g. email, phone calls, letters, etc.).
 Actions you’ll take where either the debt isn’t recoverable or you need to pursue legal action to aid
the collection.
 A clause stating that you’ll suspend any business with the defaulting debtor,
 SARS will want to see the following evidence :
 levied interest on overdue accounts
 perhaps offered settlement discounts to encourage payment
 sent reminders to the debtor
 sent letters of demand
 the reasons why you believe the debt could go bad
INCREASE IN PROVISION FOR BAD DEBTS
When the balance of debtors increase, the provision for bad debts will also increase.
Let’s do activity 2 together
The information below is extracted from the books of Rexel Traders on 29 February 2012
Extract from Trial Balance on 29 February 2012
Balance sheet section
Debtors control
Provision for bad debts
Nominal accounts section
Bad debts
Debit
65 500
Credit
2 500
1 800
Adjustments
1. Write off the irrecoverable debt of S.Moodley, R500.
2. Provision must be adjusted to 5% of total debtors.
Solution
Step
1
Step
2
Step
3
Determine the balance of debtors
65 500 – 500 = 65 000
65 000 x 5% = 3 250
3 250 – 2 500 = 750
The provision for bad debts has increased by R750
52 Accounting Grade 11 - CAPS
4
GENERAL JOURNAL OF REXEL TRADERS:
Doc
JV
JV
Date Details
28
Bad debts
Debtors control
Irrecoverable debt written off
29
Fol Debit
Credit
500
500
Provision for bad debts adjustment
Provision for bad debts
Increasing of provision for bad debts to 5% of debtors
750
750
Profit and loss
Bad debts
Provision for bad debts adjustment
Closing transfer
1 250
500
750
GENERAL LEDGER OF REXEL TRADERS
Balance Sheet Accounts Section
Dr
2012
Feb
DEBTORS CONTROL
29
Balance
b/d
65 500 2012
29
Feb
B9
Cr
Bad debts
GJ
500
Balance
c/d
65 000
65 500
2012
Mar
01
Balance
Dr
2012
Feb
b/d
65 500
65 000
PROVISION FOR BAD DEBTS
29
Balance
c/d
3 250
2011
March
2012
Feb
01
Balance
29
Provision for bad
debts adjustment
B10
Cr
b/d
2 500
GJ
7 50
3 250
2012
Mar
01
Balance
b/d
3 250
Nominal Accounts Section
Dr
2012
Feb
BAD DEBTS
29
Total
b/d
1 800
Debtors control
GJ
500
2 300
52 Accounting Grade 11 - CAPS
2012
Feb
N10
29
Profit and loss
GJ
Cr
2 300
2 300
5
Dr
2012
Feb
PROVISION FOR BAD DEBTS ADJUSTMENT
29
Provision for bad
GJ
750
2012
Feb
29
Profit and loss
N11
Cr
GJ
750
debts
Final Accounts Section
Dr
2012
Feb
PROFIT AND LOSS
29
Bad debts
GJ
500
Provision for bad
GJ
750
F2
Cr
Debts adjustment
EXTRACT FROM THE BALANCE SHEET OF REXEL TRADERS ON 29 FEBRUARY 2012
Current assets
Inventories
xxx
61 750
Trade and other receivables
Cash and cash equivalents
xxx
NOTES TO THE FINANCIAL STATEMENTS
Net trade debtors
Trade debtors [65 500 – 500]
Provision for bad debts [2 500 + 750]
Income receivable or accrued
Expenses prepaid
61 750
65 000
(3 250)
xxx
xxx
Provision for bad debts has increased to R3 250
EFFECT OF THE TRANSACTIONS ON THE ACCOUNTING EQUATION
Account Debited
Account credited Assets
Owner’s Liabilities
Equity
Provision for bad
Provision for bad
-750
-750
0
debts adjustment
debts
52 Accounting Grade 11 - CAPS
6
DECREASE IN PROVISION FOR BAD DEBTS
When the balances of debtors reduce, the provision for bad debts will also increase. The
debtors’ balances might have reduced as a result of improved collection procedures.
Let’s do activity 3 together
The information below is extracted from the books of Rexel Traders on 28 February 2013
Extract from Trial Balance on 28 February 2013
Balance sheet section
Debtors control
Provision for bad debts
Nominal accounts section
Bad debts
Debit
61 200
Credit
3 250
1 200
Adjustments
1. Received a cheque of R300 from the insolvent estate of J.Baloyi .The estate paid 50c
in a Rand .Write off the balance of his account. No entry has been made.
2. Sold an old typewriter at carrying value to S.Moyo for R400, on credit.
3. Provision must be adjusted to 5% of total debtors.
Solution
Step
1
Step
2
Step
3
Determine the balance of debtors
61 200 – 300 – 300 + 400 = 61 000
61 000 x 5% = 3 050
3 250 – 3 050 = 200
The provision for bad debts has decreased by R200
GENERAL JOURNAL OF REXEL TRADERS: 28 FEBRUARY 2013
Doc
JV
Rec
Inv
Date Details
28
Bad debts
Debtors control
Irrecoverable debt written off
45
86
Fol Debit
Credit
300
300
Bank
Debtors control
Payment received from the insolvent estate of J.Baloyi.
300
Debtors control
Asset disposal
Sold the typewriter on credit to S.Moyo
400
52 Accounting Grade 11 - CAPS
300
400
7
JV
29
Provision for bad debts
Provision for bad debts adjustment
Decreasing of provision for bad debts by R200
200
200
Profit and loss
Bad debts
Closing transfer
1 500
1 500
Provision for bad debts adjustment
Profit and loss
Closing transfer
200
200
GENERAL LEDGER OF REXEL TRADERS
Balance Sheet Accounts Section
Dr
2013
Feb
DEBTORS CONTROL
28
Balance
b/d
Asset disposal
GJ
61 200 2013
28
Feb
400
B9
Cr
Bad debts
GJ
300
Bank
GJ
300
Balance
c/d
61 200
61 600
2013
Mar
01
b/d
Balance
Dr
2013
Feb
61 600
61 200
PROVISION FOR BAD DEBTS
28
2012
March
Provision for bad
debts adjustment
GJ
200
Balance
c/d
3 050
01
Balance
B10
b/d
3 250
Cr
3 250
3 250
2013
Mar
01
Balance
b/d
3 050
Nominal Accounts Section
Dr
2013
Feb
BAD DEBTS
28
Total
b/d
1 200
Debtors control
GJ
300
2013
Feb
N10
28
Profit and loss
GJ
1 500
Dr
2013
Feb
Profit and loss
GJ
200
1 500
1 500
PROVISION FOR BAD DEBTS ADJUSTMENT
28
Cr
2013
Feb
28
Provision for bad
N11
Cr
GJ
200
debts
52 Accounting Grade 11 - CAPS
8
Final Accounts Section
Dr
2013
Feb
PROFIT AND LOSS
28
Bad debts
GJ
500
2013
Feb
28
F2
Cr
Provision for bad
Debts adjustment
200
GJ
EXTRACT FROM THE BALANCE SHEET OF REXEL TRADERS ON 28 FEBRUARY 2013
Current assets
Inventories
xxx
57 950
Trade and other receivables
Cash and cash equivalents
xxx
NOTES TO THE FINANCIAL STATEMENTS
Net trade debtors
Trade debtors [61 200 + 400 – 300 -300]
Provision for bad debts [3 250- 200]
Income receivable or accrued
Expenses prepaid
57 950
61 000
(3 050)
xxx
xxx
Provision for bad debts has reduced to R3 050 and the Negative asset is reduced
EFFECT OF THE TRANSACTIONS ON THE ACCOUNTING EQUATION
Account Debited
Account credited Assets
Owner’s Liabilities
Equity
Provision for bad
Provision for bad
+200
+200
0
debts
debts adjustment
Negative assets are reduced
Expenses are reduced
Always keep in mind that there is a limit in allowance /deduction granted by SARS
when providing for bad debts.
52 Accounting Grade 11 - CAPS
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Internal control processes that will minimise the bad debts in any business








Credit policy must be established and adhered to.
Proper credit checks and screening of potential debtors.
Limit credit granted to customers
Charge interest on overdue accounts
Offer discounts to encourage early payment
Remind debtors monthly to pay their accounts.(e.g. emails,sms ,letters)
Suspend credit on accounts overdue, offer credit after payment.
Handover of debts collection ( legal action)
DO AN ACTIVITY FROM THE TEXT BOOK
52 Accounting Grade 11 - CAPS
10