FINAL ACCOUNTS PROVISION FOR DOUBTFUL DEBTS
SUBJECT: FINANCIAL ACCOUNTING
CLASS: SS 2
DATE:
TERM: 1st TERM
TOPIC: FINAL ACCOUNTS PROVISION FOR DOUBTFUL DEBTS
PROVISION FOR DOUBTFUL DEBTS
Although a debt may not actually have become bad, there may be doubt as to whether it will be paid. It would be misleading to include that debt as an asset in the balance sheet pretending that the amount is not in doubt. On the other hand, since it has not yet become bad, it would be wrong to write it off. A provision is therefore made to cover such doubtful debt.
Provision for doubtful debt is a mere estimate of the total debt that may not be collected from the debtor. This estimated expense for bad debts which cannot be calculated with substantial accuracy is charged to the profit and loss account as an expense.
HOW TO CREATE AND MAINTAIN A PROVISION FOR DOUBTFUL DEBTS
Debit Profit and Loss Account
Credit Profit for doubtful debts Account
with the full amount of the provision
In the years that follow, the entries in the accounts will be for increases or decreases in the amounts required for the provision.
Debit Profit and Loss Account
Credit Profit for doubtful debts Account
with increases in the provision.
Debit Profit for doubtful debts Account
Credit Profit and Loss Account
with decreases in the provision.
In all the instances (A-C) as described above, the provision for Doubtful Debts is deducted
from the Debtors in the Balance Sheet.
EVALUATION
(a) Bad debts (b) Provision for doubtful debts
Illustration
A business starts on 1 January, 2002 and its financial year end is 31 December annually. A table of the debtors, the bad debts written off and the estimated doubtful debts at the end of each year is now given.
Year to Debtors at Bad debts Debts thought
31 December end of year written off at end of year
(after bad debts during the year to be doubtful to
written off) collect
N N N
2002 6,000 423 120
2003 7,000 510 140
2004 8,000 604 155
2005 6,400 610 130
You are required to show for each of the year ended 31st December……
(a) Bad Debts Account
(b) Provision for Doubtful Debts Account
(c) Profit and Loss Account (extracts)
(d) Balance Sheet (extracts)
Bad Debts
2002 N 2002 N
Dec. 31 Sundries 423 Dec. 31 Profit and Loss 423
2003 2003
Dec. 31 Sundries 510 Dec. 31 Profit and Loss 510
2004 2004
Dec. 31 Sundries 604 Dec. 31 Profit and Loss 604
2005 2005
Dec. 31 Sundries 610 Dec. 31 Profit and Loss 610
Provision for Doubtful Debts
2002 N 2002 N
Dec. 31 Balance c/d 120 Dec. 31 Profit and Loss 120
2003 2003
Dec. 31 Balance c/d 140 Jan 1 Balance b/d 120
Dec 31 Profit and Loss 20
2004 2004
Dec. 31 Balance c/d 155 Jan 1 Balance b/d 140
Dec. 31 Profit and Loss 15
2005 2005
Dec. 31 Profit and Loss 25 Jan. 1 Balance b/d 155
“ “ Balance c/d 130
155 155
Profit and Loss Account (extracts) for the year ended 31st December
N N
2002 Bad Debts 423
Provision for 120
Doubtful debts
2003 Bad Debts 510
Increase in
Provision for
Doubtful debts 20
2004 Bad Debts 604
Increase in provision
For Doubtful debts 15
2005 Bad Debts 610 2005 Reduction in provision
for Doubtful Debts 25
Balance Sheet (extracts) as at 31st December
N N
2002 Debtors 6,000
Less: Provision
For Doubtful Debts 120 5,880
2003 Debtors 7,000
Less: Provision for
Doubtful Debts 140 6,860
2004 Debtors 8,000
Less: Provision for
Doubtful Debts 155 7,845
2005 Debtors 6,400
Less: Provision for
Doubtful Debts 130 6,270
EVALUATION
GENERAL EVALUATION
Sheet (a) provision for doubtful debts (b) bad debts recovered
READING ASSIGNMENT
Simplified and Amplified Financial Accounting Page 143-150
WEEKEND ASSIGNMENT
(a) an increase in net profit (b) a decrease in gross profit (c) an increase in gross profit (d) a decrease in net profit
(a) recorded in a wrong account (b) owed by an employee (c) paid with fake currency (d) that cannot be collected again from the debtor
(a) Net sales less net purchases (b) Net sales less cost of sales (c) Net sales less closing stock (d) Net sales plus cost of goods sold
Use the information below to answer questions 4 and 5
N
Provision for bad debts 1,000 Cr
Bad Debts 500 Dr
Debtors 50,000 Dr
Additional bad debts to be written off 500
New provision for bad debts to stand at 5% of debtors.
(a) N47,025 (b) N46,550 (c) N45,600 (d) N43,225
(a) N2,000 (b) N1,500 (c) N1,000 (d) N500
THEORY
Mr. Okonkwo’sbooks of account shows the information for four years ended 31st December, 2000. The balance of debtors and bad debts were given for the four years.
Debtors Bad
Balance Debts
N N
31st December, 1997 40,000 2,000
31st December, 1998 30,000 1,000
31st December, 1999 50,000 2,500
31st December, 2000 60,000 3,000
Provision for doubtful debts brought forward at 1st January, 1997 was N600.
Mr. Okonkwo makes provision for doubtful debts at the rate of 10% on total debtors outstanding after deducting bad debts for the period.
You are required to prepare the following accounts for the years ended 31st December, 1997, 1998, 1999 and 2000.
(a) Bad Debts Account
(b) Provision for doubtful debts Account
(c) Profit and Loss Account
(d) Balance Sheet (extract)
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