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PROVISIONS
BAD DEBTS AND PROVISION FOR BAD DEBTS / PROVISION FOR DOUBTFUL DEBTS
If a firm finds it is impossible to collect a debt that should be written as bad debt.
BAD DEBTS
Are risks which are under taken when some of the customers [debtors] fail to pay their debts. The debts failed to be paid are the expenses for the firm and transferred to the profit and loss account.
Example
Goods sold to C. Chacha on 5th Jan 1995 Tshs 900, he had become bankrupt. On 16th Feb 1995 also the goods sold to R magembe for Tshs 2400, he managed to pay 2,000 on 17th may 1995 but he would never be able to pay the final Sh. 400.
DR C. CHACHA A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
5.1.1995 | sales | 900 | 31.12.1995 | bad debts | 900 | ||
DR MAGEMBE A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
5.1.1995 | sales | 2,400 | cash | 2,000 | |||
bad Debts | 400 | ||||||
2,400 | 2,400 | ||||||
DR BAD DEBTS A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
C. Chacha | 900 | 31.12.1995 | p&l a/c | 1,300 | |||
R.Magembe | 400 | ||||||
1,300 | 1,300 | ||||||
DR | EXTRACT PROFIT AND LOSS A/C | CR | ||
31.12.1995 | bad debts | 1300 | ||
PROVISION FOR BAD DEBTS
These are the amount which the owner for the business doesn’t expect to be paid [total written off.
The treatment of this amount should be;-
Dr: profit and loss a/c
Cr: provision for bad debts a/c
Example
At 31st December 1993 debtors amounted to Tshs 1,000,000. It is estimated that 2% of debts will prove to be bad debts and it is decided to make provision for them.
DR PROVISION FOR BAD DEBTS A/C CR
DATE | DETAILS | F | DATE | DETAILS | F | AMOUNT | |
31.12.1993 | balance c/d | 20,000 | 31.12.1993 | P & L A/C | 20,000 | ||
1.1.1994 | balance b/d | 20,000 | |||||
DR | PROFIT AND LOSS A/C | CR | ||
31.12.1993 | Provision for bad debts | 20,000 | ||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 1,000,000 | ||||||
less: Provision for B.Debts | 20,000 | 980,000 | |||||
INCREASING THE PROVISION FOR BAD DEBTS
The provision carried forward to the next date of balancing may be insufficient as provision on Sundry debtors on the book of that date.
Example
On the 1st jan 1998 there was a balance of Tshs 5,000 in the provision for bad debts account and it was decided to maintain the provision of 5% of the debtors of Tshs 120,000 on 31st December 1998.
DR PROVISION FOR BAD DEBTS A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31.12.1998 | balance c/d | 6,000 | 1.1.1998 | balance b/d | 5,000 | ||
31.12.1998 | profit and loss a/c | 1,000 | |||||
6,000 | |||||||
1.1.1999 | balance b/d | 6,000 | |||||
DR | EXTRACT PROFIT AND LOSS A/C | CR | ||
31.12.1998 | Provision for bad debts | 1,000 | ||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 120,000 | ||||||
less: Provision for B. Debts | 6,000 | 114,000 | |||||
DECREASING PROVISION FOR BAD DEBTS
It may appear at the next balancing time existing provision is more than adequate owing to a full in the total of sundry debtors.
The provision is shown as a credit balance, therefore, to reduce it, we would raise debit entry in the provision account and credit would be shown in the profit and loss account
Example
On the 1st January 1998 there was a balance of Tshs 5,000 in the provision for bad debts account and it was decided to maintain the provision at 5% of the debts of Tshs 80,000 on 31st December 1998.
Required;
a) The provision for bad debts
b) profit and loss account and
c) Balance sheet extract as at 31st December 1998
DR PROVISION FOR BAD DEBTS CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31. 12.1998 | balance c/d | 4,000 | 1.1.1998 | balance b/d | 5,000 | ||
3 1 12.1998 | profit and loss a/c | 1,000 | |||||
5,000 | 5,000 | ||||||
1.1.1999 | balance b/d | ||||||
DR | EXTRACT PROFIT AND LOSS A/C | CR | ||
31.12.1998 | Provision for bad debts | 1,000 | ||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 80,000 | ||||||
less: Provision for B. Debts | 4,000 | 76,000 | |||||
Example
In the new business during the year ended 31st December 1994 the following debts are found written off on the data shown.
30 April H. Gordon Tshs 1100
31st August D Bellamy Tshs 640
31st October J Alderton Tshs 120
On 31st December 1994 the schedule of remaining debtors amounting in total to Tshs 68,500 is examined, it decided to make a provision for doubtful debts of Tshs 2,200
You are required to show
a) The bad debts a/c and provision for bad debts a/c
b) Charge to the profit and loss a/c
c) The relevant extract for the balance sheet as at 31st December 1994
Dr BAD DEBTS A/C Cr
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
30.4.1994 | H. Gordon | 1,100 | 31.12.1994 | p&l a/c | 1,860 | ||
31.8.1994 | 640 | ||||||
31.10.1994 | J. Alderton | 120 | |||||
1,860 | 1,860 | ||||||
DR PROVISION FOR BAD DEBTS A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31.12.1994 | balance c/d | 2,200 | 31.12.1994 | P & L A/C | 2,200 | ||
1.1.1995 | balance b/d | 2,200 | |||||
Dr EXTRACT PROFIT AND LOSS a/c Cr
31.12.1994 | 1860 | |||
31.12.1994 | Provision for bad debts | 2,200 | ||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 68,500 | ||||||
less: Provision for B. Debts | 2,200 | 65,300 | |||||
EXAMPLE.
A business had always made a provision for bad debts at the rate of 5% of debtors, on 1st January 1993 the provision for this brought forward from the previous years was Tshs 2,600. During the year to 31st December 1993 the bad debts written off amounted to Tshs 5,400 on 31st December 1993. The remaining debtors totaled Tshs 62,000 and the usual provision for bad debts is to be made.
You are required to show
a) The bad debts a/c for the year 31st December 1993
b) The provision for bad debts a/c for the year
c) The relevant extract from the balance sheet as at 31st December 1993
Dr BAD DEBTS Cr
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31.12.1993 | debtors | 5,400 | 31.12.1993 | P &L A/C | |||
DR PROVISION FOR BAD DEBTS A/C CR
DA DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31. 31.12.1993 | balance c/d | 3,100 | 1.1.1993 | balance b/d | 2,600 | ||
31.12.1993 | 500 | ||||||
3,100 | 3,100 | ||||||
1.1.1994 | balance b/d | 3,100 | |||||
Dr PROFIT AND LOSS a/c Cr
31.12.1993 | Bad Debts | 5,400 | ||
31.12.1993 | Provision for bad debts | 500 | ||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 62,000 | ||||||
less: Provision for B. Debts | 3,100 | 58,900 | |||||
EXERCISE
1. A business had always made an allowance for doubtful debts at the rate of 2% of account receivable. On 1st January 2011 the amount for this brought forward from the previous year were 300. During the year 31st December 2011 the bad debts written off amounted to Tshs 700 on 31st December 2011 the accounts receivable balance was Tshs 17,000 and the usual allowance for the doubtful debt is to be made.
You are required to show
a) (a)The bad debts account for the year ended 31st December 2011
b) (b)The allowance for doubtful debts account for the year
c) (c)Extract profit and loss a/c.
d) (d) Extract balance sheet.
2. A business started trading on 1st January 2010 during the two years ended 31st December 2010 and 2011 the following debts were written off the bad debts account on the debts started
31 F. Land Tshs 200
31 A Clover Tshs 300
31 D ray Tshs 100
30 P. Clark Tshs 400
31 J Will Tshs 50
On 31st December 2010 the total account receivable was Tshs 5,500 it was decided to make an allowance for the doubtful debt of Tshs 800 and on 31st December 2011 the total account receivable was Tshs 59,000. It was decided to make an allowance for the doubtful debts of Tshs 900.
You are required to show;-
(a) The bad debts account and the doubtful debt account for each of the two years
(b) The relevant extract from the balance sheet as at 31st December 2010 and 2011.
PROVISION FOR DISCOUNT ON DEBTORS
Provision are not only created at the end of a financial period in connection with bad debts and doubtful debts but also in respect of discount that may be offered to the trade debtor if the debtors take the advantages of the discount allowed to them on settlement of their debts, the amount received from the debtors will be less by the total amount of discount than the value of Sundry debtors as shown in the balance sheet. For this reason the discount on the debtors must be estimated on provision on calculating the amount of discount are allowed to good debtors, only bad debtors do not receive this privilege
The entry for discounts on debtors are;-
Dr: profit and loss a/c
Cr: provision for discount on debtors
Example
At 31st December 2005. The sundry debtors of a firm stand at Tshs 500,000 you are required to give the entries necessary for a provision of 2.5% discount on sundry debtors and 5% provision for bad debts.
DR PROVISION FOR BAD DEBTS A/C CR
DATE | F | AMOUNT | DATE | DETAILS | F | AMOUNT | |
31.12.2005 | balance c/d | 12,500 | 31.12.2005 | P & L A/C | 12,500 | ||
balance b/d | 12,500 | ||||||
DR PROVISION FOR DISCOUNT ALLOWED A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31.12.2005 | balance c/d | 24,375 | 31.12.2005 | P & L A/C | 24,375 | ||
1.1.2006 | balance b/d | 24,375 | |||||
Dr EXTRACT PROFIT AND LOSS a/c Cr
31.12.2005 | Provision for bad debts | 12,500 | ||
31.12.2005 | Provision for discount allowed | 24,375 | ||
36,875 | ||||
EXTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 500,000 | ||||||
less: Provision for B. Debts | 12,500 | ||||||
Provision for D. Allowed | 24,375 | 36,875 | 463,125 | ||||
EXERCISE
The existing provision for bad debts on the book of T. Chande co. ltd is Tshs 11,200 on Dec 31st 2010 sundry debtors stood at Tshs 196,000.
Give the
entries required;
entries required;
a) Reduce the bad debts provision to Tshs 9,800.
b) Create a provision 2.5% for discount on debtors.
DR PROVISION FOR BAD DEBTS CR
D DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | AMOUNT |
31 31.12.2010 | profit and loss a/c | 1,400 | balance b/d | 11,200 | |||
31. 31.12.2010 | balance c/d | 9,800 | |||||
11,200 | 11,200 | ||||||
1.1.2011 | balance b/d | 9,800 | |||||
DR PROVISION FOR DISCOUNT ALLOWED A/C CR
DATE | DETAILS | F | AMOUNT | DATE | DETAILS | F | |
31.12.2010 | balance c/d | 4,655 | 31.12.2010 | P & L A/C | 4,655 | ||
1.1.2011 | balance b/d | 4,865 | |||||
Dr EXTRACT PROFIT AND LOSS a/c Cr | ||||||
31.12.2010 | Provision for discount allowed | 4,655 | Provision for bad debts | 1,400 | ||
E
XTRACT BALANCE SHEET
XTRACT BALANCE SHEET
liabilities | Assets | ||||||
Current Assets | |||||||
Debtors | 196,000 | ||||||
less: Provision for B. Debts | 9,800 | ||||||
Provision for D. Allowed | 4,655 | 14,455 | 181,545 | ||||
