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ACT 1100
Introduction to
Accounting
Summer Course
Lecturer: Troy J. Wishart
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Lecture Notes 5
Definition
• Bad Debt is an amount written
off against a debtor who has
failed to honour his obligations
within a reasonable period, as a
result of a credit transaction in
the past.
Definition
• Bad Debt is charged direct to the
debtor’s account so as to
eliminate the amount owing,
which is an asset of the Business.
How are Bad Debts Determined?
The three most commonly used methods to
determined Bad Debts are as follows:
1. A percentage of debtors
 based on past experience.
2. An examination of the accounts
 of individual debtor and listing debts likely
to become bad.
3. Ageing Schedule.
How are Bad Debts Determined?
 Bad debt can either be
written off to a Bad Debt
account or written off against
the provision for bad debts
account.
Accounting Treatment
• The double entry is:
–Debit the Bad Debt account
–Credit the Debtor’s account
with the amount written off.
Accounting Treatment
• Actual debts are written off in
the profit and loss account in
the year that the debt is
recognised as bad.
Bad Debt – Exercise
• Two debtors Lall and Greene owed the business
$85 and $104 respectively from earlier
transactions.
• Both debtors had failed to honour their
obligation, but Greene only after making an
earlier payment of $20 in relation to his debt of
$104, some 18 months ago.
• The directors decided to write off both debts.
• Enter the transactions in the appropriate
accounts.
Recovery of Bad Debt
• If bad debt is recovered during
the next accounting period, we
must re-open the account by:
Debiting the Debtor’s account
and
Crediting Bad Debt account.
Recovery of Bad Debt
• To account for the receipt from the
Debtor:
Debit the Cash account and
Credit the Debtor’s account.
Recovery of Bad Debt
• If the debt is recovered
sometime in the future,
Credit the bad debt recovery
account and
Debit the cash account with the
amount received.
Lecture Notes 5
Provision for Bad Debts
Definition
• A provision is any amount:
– retained as reasonably necessary
– for the purpose of providing for any liability
or loss
– which is either likely to be incurred,
– or certain to be incurred
– but uncertain as to amount or as to the
date on which it will arise.
What is it?
• An account showing the expected
amounts of debtors at the balance
sheet who might not be able to
pay their accounts.
Why are they needed?
• The value of the debtors on the
balance sheet will be showing too
high a value and could mislead
anyone.
Why are they needed?
• It allows for a more accurate
calculation of profit and losses.
• It is in keeping with the matching
principle of accounting
How are they different from Bad debts?
Bad debts are
The provision for
amounts that the
bad debts are best
business is certain guesses of debts
will not collect that will go bad.
be collected.
How are they different from Bad debts?
Provisions for
Bad Debts are bad debt does
written off not write off
the debt.
How are they different from Bad debts?
To make provision
for bad debt is to
make provisions
for possible
bad debts.
Bad debts are
debts
already
bad.
Why make a Provision
• The provision for bad debts
account is opened to cater for
expected or probable loss.
Why make a Provision
• Provision for bad debt is seen as
matching expenses of the period
against revenue of that period.
How do they come about?
• K Charles who business begun on Jan 1, 2000 has sold
goods for $50,000.
• Included in the total is a credit sale of $250 to C Young
who has died.
• Besides that debt a credit sale of $550 to L Hall is
unlikely to be paid.
• Hall’s 3 month credit ends on Jan 31, 2001, but K
Charles has to produce a set of financial statements on
Dec 31, 2000.
• Charles can’t wait until Jan 31, ‘01 to see if Hall will pay.
How to Treat a Provision for Bad Debt
• The provision is not entered into
any debtor’s account, since the
specific debtor who may default
is not known.
How to Treat a Provision for Bad Debt
• To create a provision for bad
debt –
 Debit the Profit and Loss
account
 Credit the Provision for Bad
Debt account.
How to Treat a Provision for Bad Debt
• To increase a provision –
 Credit the Provision for Bad Debt
account with the increase
 Debit the Profit and Loss account
with the said amount.
How to Treat a Provision for Bad Debt
• For a decrease in the provision –
 Debit the Provision for Bad
Debt account with the
decrease
 Credit the Profit and Loss
account with a similar amount.