Bad debts
Explanation
If a business finds it impossible to collect debt then the debt should be
‘written off’ as a bad debt.
A bad debt is therefore an expense for the business.
MP Ltd sold goods costing £50 to Mr Farnish. Unfortunately Mr Farnish is
experiencing financial difficulties and is unable to pay his debt.
MP Ltd also sold goods costing £240 to Mr Goldstone. Mr Goldstone paid
£200, but is unable to pay the remaining £40.
Using white boards, show the affects of these bad debts on the three
accounts
Example
Dr
Sales
Mr Farnish Account
Cr
£
£
50
Dr
Bad debts
50
Mr Goldstone Account
£
240
Sales
Dr
Cr
£
200
40
Cash
Bad debts
Bad debts Account
Dr
Mr Farnish
Mr Goldstone
£
50
40
90
Cr
Profit & Loss
a/c
Cr
£
90
Provision for bad debts
It is impossible to determine with absolute accuracy how much the value of
bad debts will be. In order to arrive at a figure of doubtful debts, a business
must first consider that some debtors will never be able to pay whilst other
might be able to pay a some of the debt.
A doubtful debt = not sure if the debt can be repaid
A bad debt = the debt will not be repaid
Some businesses make an ‘aging schedule’ showing how long the debts have
been owing. The longer the debt has been owed the more likely these debts
will be turned in to ‘bad debts’
Period debt owing
£
% doubtful
Allowance
1-4 weeks
5,000
1
50
5-7 weeks
3,000
3
90
8-10 weeks
800
4
32
10-15 weeks
200
5
10
Example
At 31 December 2011, the accounts receivable figure after deducting bad
debts was £10,000. it is estimated that 2% of the debts (£200) will
eventually prove to be bad debts and it is decided to make a provision for
these.
Profit & Loss
Dr
Allowance for
doubtful debts
£
200
Allowances for doubtful debt
£
Cr
Dr
£
£
Cr
Profit & loss 200
Example
A business started on 1 January 2007 and its financial year end is 31
December. A table of debtors, the bad debts written off and the
estimated doubtful debts at the rate of 2% of debtors at the end of
each year, as well as the double entry accounts are below.
See worksheet
Assessment 1
Hart & Partners started a business on January 1 2009. During its first
year of trading the following debts were found to be bad and the
business decided to write them off as bad:
May 16
Bayley
£550
July 31
Carter
£223
Nov 9
Roche
£467
On 31 December 2009, the schedule of remaining debtors, amounting in
total to £26,000, is examined and it is decided to make a provision for
doubtful debts of 2%.
1. Show the bad debts account and the provision for doubtful debts
account
2. The charge to the profit & loss account
3. The relevant extracts from the balance sheet
Assessment 2
Date
Total debtors
2007
7000
2008
8000
2009
6000
2010
7000
Profit & Loss
Dr / Cr
Final figure for
Balance sheet
The table shows the figure for debtors appearing in a trader’s books. The
provision for doubtful debt is to be 1% of debtors. Complete the table
indicating the amount to be debited or credited to the profit & loss
accounts for the final year ended and the amount for the final figure of
debtors to appear in the balance sheet on each date.
Questions –
In a new business during the year ended 31 December 2013, the following
debts are found to be bad, and are written-off on the dates shown:
31 May S.Gill & Son £600
30 Sept H.Black Ltd £400
30 Nov A.Thom £200
On 31 December the schedule of remaining accounts receivable totalling
£15,000 is examined and it is decided to make an allowance for doubtful debts
of £500.
You are required to show:
a. The bad debts a/c and the allowance for doubtful debts a/c
b. The charge to the income statement
c. The relevant extracts from the statement of financial position as at 31
December 2013
Allowance for
doubtful debts a/c
Bad debts a/c
Dec 31
May 31 S.Gill & Son 600
Dec 31
P&L
500
P&L 1,200
Sep 30 H.Black Ltd 400
Nov 30 A.Thom
200
1,200
1,200
Income statement (extract)
Sales:
COGS
Gross Profit
Expenses:
Bad debts
Allowance for doubtful debts
...
...
Net Profit
Statement of financial
position (extract)
Fixed Assets:
Current Assets:
Debtors - £15,000
less allowance for doubtful debt (£500)
£14,500
Liabilities
Capital employed
Question 2
A business had always made an allowance for doubtful debt at the rate of 2% of accounts
receivable. On 1 January 2011 the amount for this brought forward from the previous year was
£300.
During the year to 31 December 2011 the bad debts written-off amounted to £700
On 31 December the accounts receivable balance was £17,000 and the usual allowance for
doubtful debt was made (2%)
You are required to show:
•The dab debts account for the year ended 31 December 2011
•The allowance for doubtful debts account for the year
•Extract from the income statement
•Extract from the statement of financial position.
Bad debts a/c
Allowance for
doubtful debts a/c
Jan 1 bal b/d 300
Dec 31 bal c/d 340
Dec 31 P&L 40
340
340
Homework –
1. finish bad debt work book
2. Draw a bad debt poster on the last 2 pages in
the bad debt work book explaining the process of
bad debts. Use page 285-294 to help you.
Tuesday