C hapter 24: Bad debts and provisions for

bad debts and discounts

allowed
Contents of chapter
This chapter explains what bad debts are and how they are accounted for. In addition, in keeping with the
conservatism convention, provision can be made for possible bad debts and discounts allowed to debtors at the
year end. The accounting entries for these are fully covered.

Notes for teachers

1 Students often find this topic difficult to understand. It is better if extra time can be spent on it.

A debt which is definitely proved to be bad should be written off immediately.

2

You can still try to get payment of the debt legally, even though you have written it off as a bad debt.
3

Possible bad debts (or called doubtful debts) can be estimated and provided for in the books.
4

Students should remember:

5
(i) An increase in a provision will mean the amount of that increase being debited to the profit and loss
account.
(ii) A reduction in a provision will mean the amount of that reduction being credited to the profit and
loss account.
(iii) The balance in the provision account at the balance sheet date should be shown on the balance
sheet as a deduction from debtors.

In public examinations, bad debts and the provisions concerning debtors usually appear in final accounts
6
questions, rather than in questions on their own.

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 Answers to MCQs and exercises
24.1 C 24.2 B 24.3 C 24.4 D 24.5 B

24.6
D Fung
20X7 $ 20X7 $
Jan 1 Balance b/f 200 Feb 1 Cash 150
" 1 Bad debts 50
200 200

C Chang
20X7 $ 20X7 $
Jan 1 Balance b/f 120 Mar 10 Cash 36
" 10 Bad debts 84
120 120

Bad Debts
20X7 $ 20X7 $
Feb 1 D Fung 50 Dec 31 Profit and loss 134
Mar 10 C Chang 84
134 134

24.7X
Profit and Loss Accounts for the years ended 31 December (extract)
$
20X6 Bad debts 1,000
20X7 Bad debts 1,500

Balance Sheets as at 31 December (extract)

$
20X6 Debtors 19,000
20X7 Debtors 28,500

24.8X
(a) Bad Debts
20X5 $ 20X5 $
Dec 31 Debtors 298 Dec 31 Profit and loss 298
20X6 20X6
Dec 31 Debtors 386 Dec 31 Profit and loss 386
20X7 20X7
Dec 31 Debtors 344 Dec 31 Profit and loss 344
20X8 20X8
Dec 31 Debtors 477 Dec 31 Profit and loss 477

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(b) Provision for Bad Debts
20X5 $ 20X5 $
Dec 31 Balance c/d 100 Dec 31 Profit and loss 100
20X6 20X6
Dec 31 Balance c/d 130 Jan 1 Balance b/d 100
Dec 31 Profit and loss 30
130 130
20X7 20X7
Dec 31 Profit and loss 15 Jan 1 Balance b/d 130
" 31 Balance b/d 115
130 130
20X8 20X8
Dec 31 Balance c/d 150 Jan 1 Balance b/d 115
Dec 31 Profit and loss 35
150 150
20X9
Jan 1 Balance b/d 150

(c) Profit and Loss Accounts for the years ended 31 December (extract)
$ $
20X5 Bad debts 298
Provision for bad debts 100

20X6 Bad debts 386

Provision for bad debts 30

20X7 Bad debts 344 20X7 Provision for bad debts 15

20X8 Bad debts 477

Provision for bad debts 35

(d) Balance Sheets as at 31 December (extract)

$ $
20X5 Debtors 12,000
Less Provision for bad debts 100 11,900

20X6 Debtors 15,000

Less Provision for bad debts 130 14,870

20X7 Debtors 14,000

Less Provision for bad debts 115 13,885

20X8 Debtors 18,000

Less Provision for bad debts 150 17,850

24.9
Bad Debts
20X5 $ 20X5 $
Mar 31 Debtors 1,000 Mar 31 Profit and loss 1,000
20X6 20X6
Mar 31 Debtors 500 Mar 31 Profit and loss 500
20X8 20X8
Mar 31 Debtors 600 Mar 31 Profit and loss 600

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 Provision for Bad Debts
20X5 $ 20X5 $
Mar 31 Balance c/d 300 Mar 31 Profit and loss [($7,000 – $1,000) × 5%] 300
Apr 1 Balance b/d 300
20X6 20X6
Mar 31 Balance c/d 375 Mar 31 Profit and loss [($8,000 – $500) × 5% – $300] 75
375 375
Apr 1 Balance b/d 375
20X7
Mar 31 Profit and loss [$375 – ($6,000 × 5%)] 75
" 31 Balance c/d 300
375 375
Apr 1 Balance b/d 300
20X8 20X8
Mar 31 Balance c/f 320 Mar 31 Profit and loss
[($7,000 – $600) × 5% – $300] 20
320 320

Profit and Loss Accounts for the years ended 31 March (extract)
$ $
20X5 Bad debts 1,000
Provision for bad debts 300

20X6 Bad debts 500

Provision for bad debts (increase) 75

20X7 Provision for bad debts (reduction) 75

20X8 Bad debts 600

Provision for bad debts (increase) 20

Balance Sheets as at 31 March (extract)

$ $
20X5 Debtors 6,000
Less Provision for bad debts 300 5,700

20X6 Debtors 7,500

Less Provision for bad debts 375 7,125

20X7 Debtors 6,000

Less Provision for bad debts 300 5,700

20X8 Debtors 6,400

Less Provision for bad debts 320 6,080

24.10X
(a) Provision for Bad Debts
20X7 $ 20X7 $
Sep 30 Balance c/d 1,186 Sep 30 Profit and loss 1,186
20X8 [($12,000 – $60 – $80) × 10%]
Sep 30 Profit and loss 186 Oct 1 Balance b/d 1,186
" 30 Balance c/f 1,000
1,186 1,186

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(b) T Young
Profit and Loss Accounts for the years ended 30 September (extract)
$ $
20X7 Bad debts ($60 + $80) 140
Provision for bad debts 1,186
20X8 Provision for bad debts 186

(c) T Young
Balance Sheets as at 30 September (extract)
$ $
20X7 Debtors 11,860
Less Provision for bad debts 1,186 10,674

20X8 Debtors 10,000

Less Provision for bad debts 1,000 9,000

24.11
(a) Bad Debts
20X7 $ 20X7 $
Mar 31 Debtors 2,000 Mar 31 Profit and loss 2,000
20X8 20X8
Mar 31 Debtors 1,500 Mar 31 Profit and loss 1,500

(b) Bad Debts Recovered

20X8 $ 20X8 $
Mar 31 Profit and loss 500 Jan 31 Mr Robinson 500

(c) Provision for Bad Debts

20X7 $ 20X7 $
Mar 31 Balance c/d 320 Mar 31 Profit and loss [($18,000 – $2,000) × 2%] 320
Apr 1 Balance b/d 320
20X8 20X8
Mar 31 Balance c/f 480 Mar 31 Profit and loss [($24,000 × 2%) – $320] 160
480 480

(d) Profit and Loss Accounts for the years ended 31 March (extract)
$ $
20X7 Bad debts 2,000
Provision for bad debts 320

20X8 Bad debts 1,500 20X8 Bad debts recovered 500

Provision for bad debts (increase) 160

24.12X
(a) Bad Debts
20X7 $ 20X7 $
Dec 31 Debtors 1,200 Dec 31 Profit and loss 1,200
20X8 20X8
Dec 31 Debtors 1,600 Dec 31 Profit and loss 1,600
20X9 20X9
Dec 31 Debtors 2,350 Dec 31 Profit and loss 2,350

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 (b) Bad Debts Recovered
20X8 $ 20X8 $
Dec 31 Profit and loss 350 Nov 30 Mrs P Yip 350
20X9 20X9
Dec 31 Profit and loss 150 Dec 31 Debtors 150

(c) Provision for Bad Debts

20X7 $ 20X7 $
Dec 31 Balance c/d 2,000 Dec 31 Profit and loss 2,000
20X8 20X8
Dec 31 Balance c/d ($56,000 × 5%) 2,800 Jan 1 Balance b/d 2,000
Dec 31 Profit and loss 800
2,800 2,800
20X9 20X9
Dec 31 Profit and loss 700 Jan 1 Balance b/d 2,800
" 31 Balance c/f ($42,000 × 5%) 2,100
2,800 2,800

(d) Profit and Loss Accounts for the years ended 31 December (extract)
$ $
20X7 Bad debts 1,200
Provision for bad debts 2,000

20X8 Bad debts 1,600 20X8 Bad debts recovered 350

Provision for bad debts (increase) 800

20X9 Bad debts 2,350 20X9 Provision for bad debts (reduction) 700
Bad debts recovered 150

24.13
Bad Debts
20X7 $ 20X7 $
Dec 31 Debtors 2,960 Dec 31 Profit and loss 2,960

Provision for Bad Debts

20X7 $ 20X7 $
Dec 31 Balance c/f 1,132 Jan 1 Balance b/f 672
Dec 31 Profit and loss
[($25,600 – $2,960) × 5% – $672] 460
1,132 1,132

Provision for Discounts Allowed

20X7 $ 20X7 $
Dec 31 Balance c/f 538 Jan 1 Balance b/f 430
Dec 31 Profit and loss [($25,600 – $2,960 – $1,132)
× 2.5% – $430] 108
538 538

Profit and Loss Account for the year ended 31 December 20X7 (extract)
$
Bad debts 2,960
Provision for bad debts (increase) 460
Provision for discounts allowed (increase) 108

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 Balance Sheet as at 31 December 20X7 (extract)
$ $
Debtors 22,640
Less Provision for bad debts 1,132
Provision for discounts allowed 538 1,670
20,970

24.14X
(a) Profit and Loss Account for the year ended 31 March 20X6 (extract)
$
Bad debts 14,000
Provision for doubtful debts
[($334,000 – $14,000) × 3%] 9,600
Provision for discounts allowed
[($334,000 – $14,000 – $9,600) × 2%] 6,208

Profit and Loss Account for the year ended 31 March 20X7 (extract)
$
Provision for doubtful debts (increase)
[($415,000 × 3%) – $9,600] 2,850
Provision for discounts allowed (increase)
[($415,000 – $9,600 – $2,850) × 2% – $6,208] 1,843

Profit and Loss Account for the year ended 31 March 20X8 (extract)
$
Provision for doubtful debts (reduction)
[($360,000 × 2%) – $9,600 – $2,850] 5,250
Provision for discounts allowed (reduction)
[($360,000 – $7,200) × 2% – $6,208 – $1,843] 995
Bad debts recovered 7,000

(b) Balance Sheet as at 31 March 20X6 (extract)

$ $
Current Assets
Debtors 320,000
Less Provision for doubtful debts 9,600
Provision for discounts allowed 6,208 15,808
304,192

Balance Sheet as at 31 March 20X7 (extract)

$ $
Current Assets
Debtors 415,000
Less Provision for doubtful debts 12,450
Provision for discounts allowed 8,051 20,501
394,499

Balance Sheet as at 31 March 20X8 (extract)

$ $
Current Assets
Debtors 360,000
Less Provision for doubtful debts 7,200
Provision for discounts allowed 7,056 14,256
345,744

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