ZIMSEC O Level Principles of Accounts Notes: Introduction to Bad Debts

  • To understand the concept of Provision for Doubtful debts first we must look at Bad Debts
  • As outlined during the discussion of the matching/accruals concept
  • Most businesses conduct business on credit in addition to cash sales
  • Typically with cash sales payment is received when the goods are sold
  • With credit however, payment is received at a later date
  • Thus far it has been taken for granted that payment will be received
  • In reality, for a number of reasons, there is always the risk that some of the business’s debtor’s will not pay
  • This is a normal business risk and such bad debts are a normal business expense
  • They should be written against profit for the period in which they occur
  • The bad debts must also be written off from the current assets figure (Debtors/Trade Receivables)

Reasons for bad debts

  • The debtor is refusing to pay one or more invoices
  • The debtor is refusing to pay part of an invoice
  • The debtor can only pay part of the debt due to death or bankruptcy

Entries to record a bad debts

  • The following entries must be made in the books as soon as a bad is considered:
    1. Dr Profit and Loss (This is shown as an expense in the Income Statement)
    2. Cr The Debtors Account
  • This is done in the period in which the debt is considered to be bad,
  • The debt cannot be written off retroactively on last year period
  • The story does not end there
  • It is obvious there is need for a mechanism that accounts for bad debts before they occur
  • This is where the provision for doubtful debts come in

To access more topics go to the Principles of Accounting Notes.

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