Professional Documents
Culture Documents
Bad Debts
When the firm finds that it is impossible to collect a debt, that debt should be written off as a bad debt. Accounting Entries:
Dr Bad Debts Cr Debtor With the irrecoverable amount of a debt
Example
During the year, a company sold goods for $2,000 to Mr. Lee, $1,500 to Mr.Wong and $300 to Mr. Wu. Mr. Lee and Mr. Wong paid the company $800 and $1,000 respectively Later, Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts. The company decided to write these off as bad debts.
$ 2,000
2,000
$ 800 1,200
2,000 $ 1,000 500
1,500
Mr. Wong Sales $ 1,500 1,500 Mr. Wu Sales $ 300 Bad Debts $ 300 Bank Bad Debts
Bad Debts $ 800 800 $ Mr. Wong Mr. Wu 500 300 800 P/L
Accounting entries
1.
Increase in provision
Decrease in provision
5,000
5,000
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit 1994 $ $ X
5,000
5,000
Jan 1
Balance b/d
Profit and Loss Account for the year ended 31 December (Extract)
Gross profit 1994 $ $ X 1995 $ $ X 1,000
5,000
5,000
Jan 1
Balance b/d
5,000
1,000 6,000
1996
6,000
6,000
Profit and Loss Account for the year ended 31 December (Extract)
1994 $ $ Gross profit X Add: Decrease in provision for bad debts Less: Expenses Increase in provision for bad debt 5,000 1995 $ $ X 1,000
1996
$ $ X 2,000
1995
60,000 6,000 54,000
1996
40,000 4,000 36,000
Accounting entries
Dr Debtors Cr Bad Debts Recovered Dr Cash/Bank Cr Debtors Dr Bad Debts Recovered Cr Bad Debts OR Dr Bad Debts Recovered Cr Profit and Loss With the debt reinstated in the debtors account With the amount received With the debt written off in this year to be recovered OR With the debt written off in a previous year to be recovered
Example
The following balances were part of the trial balance of Mr. Chan on 31 December 1996:
Debtors $ 10,000
Bad Debts
1,000
During the year, Mr. Chan received $300 and $1,200 from debtors, whose debts had been previously written off as bad debts in the current year and last year respectively. No entry has been made for these transactions
Bank
1996 $
Dec 31 Debtors
1996
1,500 Debtors
$ 1996 $
1,500
1996
1996
Profit and Loss Account for the year ended 31 December (Extract)
1996
Gross profit Add: Bad Debt Recovered Less: Expenses Bad Debt 700 $ $ X 1,200