Do you know how to record bad debts and the provision for bad debts in the accounts?
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at the double entry for bad debts and the provision for bad debts.
Just as a quick refresh we found out in the prior video on “What are Bad debts?” that
bad debts arise when a credit customer does not pay their debts.
Additionally, some of the reasons for a bad debt happening could be due to a customer
going bankrupt, the business maybe a victim of fraud, there could be a dispute on the
goods or services. Or the debt might be too small to be worth pursuing in law.
Also in the video on “What is the provision for Bad Debts?” we found out that a provision
is usually calculated by a business to estimate the debtors that will turn into bad debts.
The bad debt provision is an approximate value which is set against the future recognition
of debtors as being uncollectible and this will normally be calculated as a percentage
of the total debtor’s amount.
Let’s now look at how they are both treated in the accounts.
Terry is a car reseller, who sells the majority of his cars on credit. Recently one of the
customers that bought a red sports car went bankrupt and could not pay her debts of £5,000
owing to Terry.
Also, due to this customer going bankrupt, Terry wants to account for the debtors who
might also not be able to pay him in the year as well as for future periods. He currently
has £75,000 in debtors and from previous experience 6% of debtors do not pay back.
How will Terry record the scenarios in the accounts?
Firstly, it was briefly mentioned in both the previous videos how bad debts and its
provision is treated in the accounts.
A bad debt is recorded in the accounts as an expense on the balance sheet and reduces
the net income. Whereas the provision is recorded in the bad debt expense account and the provision
for bad debts account.
For the £5,000 of bad debts. We would enter the details on debit side of the Bad Debt
expense T account. Let’s assume the transaction took place on the 30th November 2017, which
can be shown as 30/11/2017. Then we will note it as the customers name, for this example
S.Jones, in the details column because that is the name of the other
account that has been affected during the transaction. And lastly 5,000 is entered in
the £ column.
As this is the only bad debt in the period we will close off the account and therefore
both sides need to total to £5,000 like so. However, £5,000 is missing on the credit
side, as a result we will post the £5,000 to the profit and loss account as this is
an expense.
Now for the provision for bad debts. We should work out the provision amount first which
will be the debtors amount multiplied by the historical percentage of debtors that do not
pay. So the provision will be £75,000 x 6% = £4,500.
Since we know the provision amount we will enter the details on credit side of the provision
for bad debts T account. The transaction took place on the same date, which can be shown
as 30/11/2017. Then we will note the detail as Profit and Loss because that is the name
of the other account affected during the transaction and it will be treated as an expense. And
lastly 4,500 is entered in the £ column.
So that was the explanation of the double entry for bad debts and the provision for
bad debts. If you enjoyed it, press the like button.
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