Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Bad Debts and Provision for Doubtful Debts Example
- We have looked at Bad Debts, Provision for Doubtful Debts and Bad Debts Recovered
- Now we will look at an example:
A business, which started trading on 1 January 20X7, adjusted its doubtful debt provision at the end of each year on a percentage basis, but each year the percentage rate is adjusted in accordance with the current ‘economic climate’. The following details are available for the three years ended 31 December 20X7, 20X8 and 20X9.
| Year | Bad Debts Written off year to 31 December | Debtors at 31 December | Percentage for Doubtful Debts |
|---|---|---|---|
| $ | $ | % | |
| 20x7 | 1240 | 41000 | 4 |
| 20x8 | 2608 | 76000 | 6 |
| 20x9 | 5424 | 88000 | 5 |
You are required to show:
- Bad Debts Accounts for each of the three years.
- Provision for Doubtful Debts Accounts for each of the three years.
- Balance Sheet/Statement of Financial Position extracts as at 31 December 20X7, 20X8 and 20X9.
Solution
Here are the two accounts:
| Bad Debts Account | ||||||
| 20x7 | 20x7 | |||||
| Date | Details | Amount($) | Date | Details | Amount($) | |
| 31 December | Debtors Control | 1240 | 31 December | Profit and Loss | 1240 |
|
| 20x8 | 20x8 | |||||
| 31 December | Debtors Control | 2608 | 31 December | Profit and Loss | 2608 |
|
| 20x9 | 20x9 | |||||
| 31 December | Debtors Control | 5424 | 31 December | Profit and Loss | 5424 |
|
| Provision for Doubtful Debts Account | ||||||
| 20x7 | 20x7 | |||||
| Date | Details | Amount($) | Date | Details | Amount($) | |
| 31 December | Balance c/d | 1640 | 1640 |
|||
| 20x8 | 20x8 | |||||
| 31 December | Balance b/d | 4560 | 1 January | Balance b/d | 1640 | |
| 31 December | Profit and Loss | 2920 | ||||
4560 | 4560 |
|||||
| 20x9 | 20x9 | |||||
| 31 December | Profit and Loss | 160 | 1 January | Balance b/d | 4560 | |
| 31 December | Balance c/d | 4400 | ||||
4560 | 4560 |
And the extracts
| 20x7 | $ | $ |
| Debtors | 41000 | |
| Provision for Doubtful Debts | (1640) | |
39360 |
||
| 20x8 | $ | $ |
| Debtors | 76000 | |
| Provision for Doubtful Debts | (4560) | |
71440 |
||
| 20x9 | $ | $ |
| Debtors | 88000 | |
| Provision for Doubtful Debts | (4400) | |
83600 |
||
NB
- Bad Debts have already been written off and deducted from the Debtor’s figures
- We used the control account instead of the individual debtor’s account in this instance, this perfectly valid
- To learn more go to the discussion of Control Accounts
- Only increases and decreases are recorded in the Profit and Loss Account in subsequent years
To access more topics go to the Principles of Accounting Notes.
