Bad debts and allowances for doubtful debts PDF

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MG1052: Accounting Week 19

Bad debts and allowances for doubtful debts -

What we do in next 4 weeks will be in exam/compulsory Simple write off of a bad debt

Bad debts - Consumers buy/businesses sell on credit (pay later) o Customer not paying for good = BAD DEBT - Expense o Effects NET PROFIT o No effect on gross profit Reasons for bad debts - Customer goes into administration - Customer refuses to pay/disappears - Customer disputes receipt/quality of goods Recording a bad debt - Known as “writing off” - Credit the individual debtor’s account (In the Sales Ledger) to remove the debt. o This is similar to when the debtor pays, you DR Bank (money in) and CR Sales Ledger (cancel out debt) - Debit the bad debt account to increase the expense. - This is sometimes called writing off the debt.

 Both individual customer (debtor) accounts in the Allowance for doubtful debts Sales Ledger have been ‘zeroed’, so there is no  allowance needs to/debtor be receivable at the made inyear the current end period  for Youdebts havethat Debited an might beexpense bad amongst account with a entire portfolio bad total of of £770 debts  This is then deducted from Gross Profit with other Objective  Charge as an expense for the period an amount representing debts that will never be paid

 Show (in the SoFP) a figure for Trade/Accounts Receivable as close as possible to the amount likely to be received Estimating the Allowance (what proportion of our debts are unlikely to be paid?) - Past experience - Look at each balance individually Aged Debtor Schedule  The older a debt the less likely it is that it will be paid  older debts need a higher % of ‘allowance’  The ‘pattern’ used should reflect past experience Accounting treatment  DEBIT the P&L account with the allowance  CREDIT the allowance for doubtful debts account.  Please note: You DO NOT credit the customer’s account in the S/L, the balance remains in the Trade Receivable Total

Key Point Before you calc all you must deduct actual bad debts 1. Deduct bad debts 2. Calculate your allowance

Subsequent years  The double entry above only relates to the first year an allowance is made  In subsequent years only the MOVEMENT on the allowance is taken to the Income Statement  Take care this is the part students find most difficult Increasing the allowance  Debit the profit and loss account with the increase in the allowance.

 Credit the allowance for doubtful debts account. Reducing the allowance  Debit the allowance for doubtful debts account.  Credit the profit and loss account....