Corporate Practice bd |
Accounting-treatment of bad-debts-provision-for-bad-debts
The accounting treatment for bad debts and the provision for bad debts involves recognizing the expense associated with UN-collectible accounts and creating an allowance for doubtful accounts to anticipate future bad debts.
Here’s a detailed explanation with examples.
1. Recognizing Bad Debts
When specific accounts are identified as UN-collectible, they are written off as bad debts.
Journal Entry for Bad Debts:
Bad Debts Expense Account
Dr *****
To Accounts
Receivable Account *****
Example:
Assume a company has determined that Tk. 5,000 from a specific customer is un-collectible.
Journal Entry:
Bad Debts Expense Account
5,000 Dr
To Accounts Receivable Account 5,000
2. Creating a Provision for Bad Debts
At the end of the accounting period, a provision for doubtful debts (also known as an allowance for bad debts) is created based on an estimate of un-collectible accounts.
Journal Entry for Provision:
Bad Debts Expense Account
Dr ****
To Allowance for
Doubtful Accounts ****
Example:
If the company estimates that 2% of its accounts receivable, which totals Tk. 100,000, will be un-collectible, the provision for doubtful debts would be Tk. 2,000.
Journal Entry:
Bad Debts Expense Account 2,000 Dr
To Allowance for Doubtful Accounts 2,000
3. Writing Off a Bad Debt Against the Provision
When a specific receivable is identified as un-collectible and it’s already covered by the allowance, it’s written off against the provision.
Journal Entry for Writing Off:
Allowance for Doubtful Accounts Dr ****
To Accounts
Receivable Account ****
Example:
If Tk. 1,000 of the receivable is determined to be UN-collectible, the entry would be:
Journal Entry:
Allowance for Doubtful Accounts 1,000 Dr
To Accounts Receivable Account 1,000
4. Recovering a Previously Written-Off Debt
If a debt that was previously written off is subsequently collected, it is first reinstated, and then the cash received is recorded.
Journal Entry for Reinstatement:
Accounts Receivable Account Dr ****
To Allowance for
Doubtful Accounts ****
Journal Entry for Collection:
Cash Account Dr ****
To Accounts
Receivable Account ****
Example:
If Tk. 500 of a previously written-off debt is recovered, the entries would be:
Reinstatement Entry:
Accounts Receivable Account 500 Dr
To Allowance for Doubtful Accounts 500
Collection Entry:
Cash Account 500 Dr
To Accounts Receivable Account 500
Summary of Entries
1.Recognizing Bad Debts:
Bad Debts Expense Account
Dr ****
To Accounts
Receivable Account ****
02.Creating a Provision for Bad Debts:
Bad Debts Expense Account
Dr ****
To Allowance for
Doubtful Accounts ****
03.Writing Off a Bad Debt Against the Provision:
Allowance for Doubtful Accounts Dr ****
To Accounts
Receivable Account ****
4.Recovering a Previously Written-Off Debt:
For Reinstatement Entry:
Accounts Receivable Account Dr ****
To Allowance for
Doubtful Accounts *****
Collection Entry:
Cash Account Dr ****
To Accounts
Receivable Account ****
Example Scenario
Let’s summarize the examples provided:
1.Recognizing Bad Debts:
Bad Debts Expense Account 5,000 Dr
To Accounts Receivable Account 5,000
2. Creating a Provision:
Bad Debts Expense Account 2,000 Dr
To Allowance for Doubtful Accounts 2,000
03.Writing Off Against Provision:
Allowance for Doubtful Accounts 1,000 Dr
To Accounts Receivable Account 1,000
04. Recovering Previously Written-Off Debt:
Reinstatement Entry:
Accounts Receivable Account 500 Dr
To Allowance for Doubtful Accounts 500
Collection Entry:
Cash Account 500 Dr
To Accounts Receivable Account 500
These entries ensure that the bad debts and provisions for doubtful debts are accurately recorded and managed in the financial statements.