Bad debt

The debt or claim from a debtor which becomes unrealizable is called a bad debt. It may arise duo to inability or unwillingness of the debtor to pay his dues. It is actually a loss. It is treated as operating expense and it is charged against revenue.

o If there is any doubt about the collection or recovery of a debt ,it is called a doubtful debt.It is an expected loss. Provision for bad debts:o When goods are sold profit on sale is recognized at once. o But if it is a credit sale ,it may not be collected in full. o A part or whole of the credit allowed may remain unrealized. o The uncollected or bad debt should actually be charged against revenue of the year concerned credit sale.

Doubtful debts

Provision for bad debts

But ,in practice the ultimate failure to recover the debts become clear not in the same year . To provide for anticipated bad debts against credit sale of a year ,a Provision for bad & doubtful debts is prepared. A reserve is an appropriation of profits but a provision is a charge against profits.

Provision for bad debts

As net profit is calculated after providing for bad debts, The amount set aside should be called a provision. It is either created (a) by estimating debts likely to prove bad from a through scrutiny of all debtors accounts or (b) by considering that a certain percentage of credit sales or debts outstanding account will become unrealizable.

Discount Allowed & Provision for discount on debtors

Discount Allowed It is the cash discount allowed to debtors for prompt payment of dues. It causes a loss of revenue and is charged against revenue like any operating expense Provision for discount on debtors It is the provision created annually against anticipated cash discount to be allowed to debtors

Discount received & Provision for discount on creditors

Discount received It is rebate or cash discount received from creditors for prompt payments made against credit purchases Provision for discount on creditors It is provision created in a year for cash discount anticipated to be received from creditors

Bad debt recovery

Debts which have been written of in earlier years as unrealized or bad debt subsequently recovered in full or in part in the current year. Accounting entries:-

1.Cash /Bank a/c .Dr To bad debt recovered a/c 2.Bad Debt Recovery ..Dr To P/L a/c

Accounting entries
Bad debt written off:1.Bad debt a/c Dr. To sundry debtors 2.P/L a/c Dr. To bad debt 3.Provision for bad debt a/c Dr To bad debt (if adjusted through provision a/c)

Provision for bad debts created at the end of the year (new provision or further provision) 1.P/L a/c Dr. To Provision for bad debt When existing provision (may be after adjusting bad debt ) is more than the new provision 2.Provision for bad debts a/c Dr. To profit & loss a/c

Accounting entries

Accounting entries
Discount allowed to debtors:1.Discount allowed a/c Dr. To sundry debtors 2.P/L a/c Dr. To discount allowed 3.Provision for discount on debtors a/c Dr. To discount allowed (if adjusted through provision a/c)

Accounting entries
Provision for discount on debtors (new provision or further provision) 1.P/L a/c Dr To Provision for discount on debtors When existing Provision on debtors (may be after adjustment of discount allowed ) is more than the new provision 2.Provision for discount on debtors a/c Dr To Profit & Loss a/c

Accounting entries
Discount received from creditors:1.Sundry creditors a/c Dr. To discount received 2.Discount received a/c Dr. To P/L a/c 3.Discount received a/c Dr. To Provision for discount on creditors a/c (if adjusted through provision a/c)

Accounting entries
Provision for discount on creditors (new provision or further provision) 1.Provision for discount on creditors a/c Dr To P/L a/c When existing Provision on debtors (may be after adjustment of discount allowed ) is more than the new provision. 2.Profit & Loss a/c Dr To Provision for discount on creditors a/c