BOOK KEEPING O LEVEL(FORM THREE) NOTES – PROVISIONS

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 off as bad debt.

BAD DEBTS

Bad debts are risks undertaken when some customers (debtors) fail to pay their debts. The debts that fail to be paid are expenses for the firm and transferred to the profit and loss account.

Example

Goods sold to C. Chacha on 5^th Jan 1995 for Tshs 900; he had become bankrupt. On 16^th Feb 1995, goods sold to R. Magembe for Tshs 2400; he managed to pay 2,000 on 17^th May 1995 but would never be able to pay the final Tshs 400.

DR C. CHACHA A/C CR

DR MAGEMBE A/C CR

DR BAD DEBTS A/C CR

PROVISION FOR BAD DEBTS

These are amounts which the owner of 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 31^st 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

DR PROFIT AND LOSS A/C CR

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 1^st 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 31^st December 1998.

DR PROVISION FOR BAD DEBTS A/C CR

EXTRACT BALANCE SHEET

DECREASING PROVISION FOR BAD DEBTS

It may appear at the next balancing time that the existing provision is more than adequate owing to a fall in the total of sundry debtors.

The provision is shown as a credit balance; therefore, to reduce it, we would raise a debit entry in the provision account and credit would be shown in the profit and loss account.

Example

On 1^st 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 31^st December 1998.

Required:

• a) The provision for bad debts
• b) Profit and loss account
• c) Balance sheet extract as at 31^st December 1998

DR PROVISION FOR BAD DEBTS A/C CR

EXTRACT BALANCE SHEET

Example

In the new business during the year ended 31^st December 1994, the following debts are found written off on the data shown:

• 30 April H. Gordon Tshs 1100
• 31 August D Bellamy Tshs 640
• 31 October J Alderton Tshs 120

On 31^st December 1994, the schedule of remaining debtors amounting in total to Tshs 68,500 is examined; it is 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 31^st December 1994

DR BAD DEBTS A/C CR

DR PROVISION FOR BAD DEBTS A/C CR

EXTRACT BALANCE SHEET

PROVISION FOR DISCOUNT ON DEBTORS

Provision is 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 advantage 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 as provision. When calculating the amount of discount allowed to good debtors, only bad debtors do not receive this privilege.

The entry for discounts on debtors is:

• Dr: Profit and Loss A/C
• Cr: Provision for Discount on Debtors

Example

At 31^st 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

DR PROVISION FOR DISCOUNT ALLOWED A/C CR

EXERCISE

1. A business had always made an allowance for doubtful debts at the rate of 2% of accounts receivable. On 1^st January 2011, the amount for this brought forward from the previous year was 300. During the year ended 31^st December 2011, the bad debts written off amounted to Tshs 700. On 31^st December 2011, the accounts receivable balance was Tshs 17,000 and the usual allowance for doubtful debts is to be made.

   You are required to show:

   • a) The bad debts account for the year ended 31^st December 2011
   • b) The allowance for doubtful debts account for the year
   • c) Extract profit and loss account
   • d) Extract balance sheet
2. A business started trading on 1^st January 2010. During the two years ended 31^st 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 31^st December 2010, the total accounts receivable was Tshs 5,500; it was decided to make an allowance for doubtful debts of Tshs 800, and on 31^st December 2011, the total accounts receivable was Tshs 59,000. It was decided to make an allowance for 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 31^st December 2010 and 2011

PROVISION FOR DISCOUNT ON DEBTORS

Provision is also created for discount allowed on debtors. The entries are:

• Dr: Profit and Loss A/C
• Cr: Provision for Discount Allowed A/C

Example

The existing provision for bad debts on the books of T. Chande Co. Ltd is Tshs 11,200 on 31^st December 2010. Sundry debtors stood at Tshs 196,000.

Give the entries required:

• a) Reduce the bad debts provision to Tshs 9,800
• b) Create a provision of 2.5% for discount on debtors

DR PROVISION FOR BAD DEBTS CR

DR PROVISION FOR DISCOUNT ALLOWED A/C CR