KPMBM - Bad Debts and Doubtful Debts

8/2/2019 KPMBM - Bad Debts and Doubtful Debts

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Ahmad Hafiz Zainal AbidinM Acc (UiTM), B. Acc (Hons) UiTM, Dip. Ed (MPPP)

Department of Accounting and Quantitative


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The inclusion of a degree of caution in the exerciseof the judgement needed in making the estimates

required under conditions of uncertainty

Wood & Sangster, 2008


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Assets and income are not overstated

Liabilities and expenses are not understated


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Non-current AssetsBuildings and premises 500,000

Fixtures and fittings 120,000

Machineries and equipments 100,000

720,000Current AssetsInventories 80,000

Debtors 100,000

Cash at Bank 70,000

Cash in hand 45,000295,000


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Non-current AssetsBuildings and premises 500,000

Fixtures and fittings 120,000

Machineries and equipments 100,000

720,000Current AssetsInventories 80,000

Debtors 100,000

Cash at Bank 70,000

Cash in hand 45,000295,000


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Why commercials offer sales on credit to theircustomers?

To offer flexibilities in payment to customers.

Encourage customers to buy (purchasing power).

To gain advantage in business competition.


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Businesses offer sales on credit to its customers.The business therefore taking risk that some ofthese customers (debtors) may never pay for thegoods sold to them.

In the events of uncollectible debts, these debtsmust be written-off from the assets accounts andcharged to income statement.

The uncollectible debts is called as bad debts.


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On 10 August 2011, sold goods RM2,500 on credit toTCS Sdn Bhd.

TCS Sdn Bhd

Sales

2011

Aug 1o Sales 25,000

Aug 1o TCS Sdn Bhd 25,0002011


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On 31 August 2011, TCS Sdn Bhd was declaredbankrupt and has to be written-off as bad debts.

TCS Sdn Bhd

Sales

2011

Aug 1o Sales 25,000

Aug 1o TCS Sdn Bhd 25,0002011


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On 31 August 2011, TCS Sdn Bhd was declaredbankrupt and has to be written-off as bad debts.

TCS Sdn Bhd

Bad Debts

2011

Aug 1o Sales 25,000

Aug 31 TCS Sdn Bhd 25,0002011

Aug 31 Bad Debts 25,000

2011

25,000 25,000

2011Dec 31 Profit & Loss 25,000


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Sometimes, a debt written-off in previous years isrecovered. When this happens, the debt must bereinstate in the accounts by making the followingentries:

Debit Debtors / Account Receivables

Credit Bad Debts Recovered(revenues)


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To show in the balance sheet a figure for accountsreceivable as close as possible to the true value ofaccounts receivable at the balance sheet date.

Thus, an estimation that some of the reportedaccounts receivable may be uncollectible in thefuture (become bad debts) must be incorporated inthe account / financial statements prudenceconcept.

This estimation is called as Allowance for Doubtful

Debts


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A debtor who owed RM500 to the company was declaredbankrupt at the year end and this amount has to be written-off.

Accounts Receivable

Bad Debts

2010

Dec 31 Balance b/d 70,500 Dec 31 Bad debts 500

2010

2010Dec 31 Acc. Receivable 500

Dec 31 Balance c/d 70,000

70,50070,500


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The company has decided to provide 10% of the net debtors asallowance for doubtful debts.

Accounts Receivable

2010


2010


70,50070,500

The allowance for doubtful debts are as follows:

10% x RM70,000 = RM7,000Net

debtors


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The double entries to record the increases in Allowance for

doubtful debts:Debit Income StatementCredit Allowance for doubtful debts

Accounts Receivable

Allowance for doubtful debts

2010


2010

2010Dec 31 Income Statement 7,000


70,50070,500

7,0007,000



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Income Statement (extract) for the year ended 31 Dec 2010

Expenses

Increase in provision for doubtful debts 7,000

Balance Sheet (extract) as at 31 Dec 2010

Add Current Assets

Accounts receivable / debtors 70,000less : Allowance for D. Debts 7,000 63,000


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The balances in the account of Taza Sdn Bhd as at 31 December

2010 were as follows:

Accounts receivable RM85,300

Additional Information

1. A debtor amounted RM800 was declared bankrupt and to bewritten-off.

2. An allowance for doubtful debts is to be provided at 5% ofthe net debtors.

REQUIREDShow the following:

i. Accounts receivable and allowance for doubtful debts

ii. Income Statement and balance sheet as at 31 Dec 2010


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Net debtors = debtors bad debts written-off= 85,300 800

= 84,500


= 5% x 84,500

= 4,225

(increase in allowance for doubtful debts)


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Accounts Receivable


2010


2010

2010Dec 31 Income Statement 4,225


85,30085,300

4,2254,225



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Income Statement (extract) for the year ended 31 Dec 2010

Expenses


Balance Sheet (extract) as at 31 Dec 2010

Add Current Assets

Accounts receivable / debtors 84,500less : Allowance for D. Debts 4,225 80,275


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Count the black dot


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Do you think the vertical line is straight or curve?


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Which of the center dot is bigger?


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What do you see?


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Read the passage quick and loud


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When a company provide allowance for doubtfuldebts annually, the amount of provisions fordoubtful debts would change as reflect to theamount of debtors at the year end or the rate of

estimation.

Example:

Year Debtors Provisions for D. Debts

2001 100,000 10% x 100,000 = 10,0002002 120,000 10% x 120,000 = 12,000

2003 110,000 10% x 110,000 = 11,000


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Decreases in

Allowance for

Doubtful Debts

is a revenue

Increases in

Allowance forDoubtful Debts

is an expense


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The account balances for Rahmad Trading as at 30 June 2011were as follows:

Accounts Receivables RM36,000

Provisions for Doubtful Debts 1,200

Bad Debts written-off 1,000

Additional information:

1. Bad debts to be written-off as at 30 June 2011 is RM600

2. Allowance for doubtful debts is to be provided at 5% on netdebtors.

REQUIREDShow the relevant accounts and extract financial statements.


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Net debtors = debtors bad debts written-off= 36,000 600

= 35,400


= 5% x 35,400

= 1,770

Increase in allowance for doubtful debts

= 1,770 1,200= 570


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Accounts Receivable

Allowance for Doubtful Debts

2011

June 30 Balance b/d 36,000 June 30 Bad Debts 600

2011

June 30 Balance c/d 35,400

36,000 36,000

2011 2011

June 30 Balance b/d 1,200

June 30 Balance c/d 1,770 June 30 Income statement 570

1,770 1,770


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Income Statement (extract) for the year ended 30 June 2011

Expenses

Bad debts 1,600

Increase in provision for doubtful debts 570

Balance Sheet (extract) as at 30 June 2011

Add Current AssetsAccounts receivable / debtors 35,400less : Allowance for D. Debts 1,770 33,630


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The account balances for Rahmad Trading as at 30 June 2011were as follows:

Accounts Receivables RM35,000

Provisions for Doubtful Debts 2,200

Bad Debts written-off 1,000

Additional information:

1. Bad debts recovered as at 30 June 2011 is RM1,000

2. Allowance for doubtful debts is to be provided at 5% on netdebtors.

REQUIREDShow the relevant accounts and extract financial statements.


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Net debtors = debtors + bad debts recovered= 35,000 + 1,000

= 36,000


= 5% x 36,000

= 1,800

Decrease in allowance for doubtful debts

= 2,200 1,800= 400


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Accounts Receivable

Allowance for Doubtful Debts

2011


June 30 B. Debts Recovered 1,000

2011


36,000 36,000

2011 2011



June 30 Income statement 400

2,200 2,200


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Income Statement (extract) for the year ended 30 June 2011Revenues

Bad debts recovered 1,000

Decreases in provision for doubtful debts 400

ExpensesBad debts 1,000

Balance Sheet (extract) as at 30 June 2011

Add Current Assets

Accounts receivable / debtors 36,000

less : Allowance for D. Debts 1,800 34,200


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There was a girl who was bald. She was wearing a yellow t-shirt,y. (y. = yellow) bracelet, and y. sandals. She went to her y.

house using her y. car. She took a bath in her y. shower. Afterthat she opened her y. drawer and found a green comb. She

threw it away, why?


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What starts with E, ends with E and has 1 Letter in it?


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Do you think that all of the amount of your debtors will finallyturned out as cash receipts?

DebtorsRM100,000 RM100,000


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Some of the debtors could be uncollectible and become bad.

Thus, to be realistic, the Allowance for Doubtful Debts iscreated.

DebtorsRM100,000 RM100,000DebtorsRM85,000

Bad DebtsRM15,000

RM85,000


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Now, do you think that all remaining RM85,000 will becomecash receipts in the end?

There is another possibility the discount allowed

RM75,000DebtorsRM85,000

Bad DebtsRM15,000

RM85,000DebtorsRM75,000

Discount allowedRM10,000


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Provisions for discount allowed (PFDA) are more or less the sameas PFDD, except, in arriving at this estimation, the amount ofPFDD must be deducted from the Net Debtors (as we dont givediscount to debts that we estimated to be bad).

PFDA = estimate % x (Net debtors PFDD)


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Rolls company had the following balances as at 31 December 2010:Accounts receivable RM40,000Provisions for doubtful debts 2,050Provisions for discount allowed 930Bad debts 1,000

Additional information:1. Bad debts to be written-off is RM6002. Bad debts recovered is RM2003. The following provisions are to be made:

Provisions for doubtful debts 8%Provisions for discount allowed 2%

REQUIREDShow relevant accounts and extract financial statements


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Part 1 Calculate the provisionsNet debtors = debtors bad debts to be written off

+ bad debts recovered to be reinstate

= 40,000 600 + 200 = 39,600

Provisions for doubtful debts

= 8% x 39,600 = 3,168

(increase by 1,118)

Provisions for discount allowed= 2% x (39,600 3,168) = 728.64 729

(decrease by 201)


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Accounts Receivable

Dec 31 Balance b/d 40,000 Dec 31 Bad debts 600Dec 31 Bad debts Rec. 200 Dec 31 Balance c/d 39,600

20102010

40,200 40,200

Bad debts

Dec 31 Acc. Receivable 600

Dec 31 Balance b/d 1,0002010 2010

Dec 31 Income statement 1,600

1,600 1,600

Bad debts recovered

Dec 31 Acc. Receivable 200Dec 31 Income statement 200

2010 2010

200 200

Part 2 Ledger / double entries


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Provisions for Doubtful Debts

Provisions for Discount Allowed

2010 2010

2010 2010

Dec 31 Balance b/d 2,050

Dec 31 Balance b/d 930


Dec 31 Balance c/d 729

Dec 31 Income statement 1,118

Dec 31 Income statement 210

3,168 3,168

930 930


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Income Statement (extract) for the year ended 31 December 2010Revenue

Decrease in provision for discount allowed 201

Bad debts recovered 200

Expenses


Bad debts 1,600

Balance Sheet (extract) as at 31 December 2010

Current Assets

Accounts Receivable 39,600Less : Provision for doubtful debts 3,168

Provision for discount allowed 729

35,703


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Prudence concept requires financial reports to consider futurepossible losses and not future gains. This is to avoid assetsor income being overstated and liabilities or losses beingunderstated.

Bad debts are actual losses incurs by businesses as these

debtors are dead or become insolvent. Doubtful debts are estimation made by the businesses to

consider future possible losses (of debtors which becomeuncollectible). Thus assets of debtors will be reduced to avoidfor being overstated.

Provisions for discount allowed is another estimation thatmade by businesses to consider future losses / expenses.


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Bad debts = actual amount of uncollectible debts

Net debtors = debtors bad debts to be written off + bad

debts recovered to be reinstate

PFDD = estimate % x Net debtors

PFDA = estimate % x (Net debtors PFDD)


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Bad debt is an expense Income statement(expenses)

Bad debts recovered is a revenue Incomestatement (revenue)

Increase in PFDD or PFDA Income statement

(expenses) Decrease in PFDD or PFDA Income statement

(revenue)

Net debtors Balance sheet (current assets)

Balance of PFDD and PFDA deduct from

Account Receivables (in Balance Sheet underCurrent Assets)


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We made it!


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Refer to textbook:

Business Accounting Vol. 1

Wood & Sangster

Page 282 - 285

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KPMBM - Bad Debts and Doubtful Debts

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