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.

Quick NetOne, Telecel, Africom, And Econet Airtime Recharge

If anything goes wrong, chat with us using the chat feature at the bottom right of this screen