Page 161 - Account 10

vii. Bad Debt (Loss)
Bad debt is an irrecoverable debt from the customers or from a customer during the
period of an accounting year. It results in the reduction of the customers’ debit balance
and addition to the loss. Thus, it is once charged on debit side of profit and loss A/c as a
loss and then deducted from the debtors in the balance sheet.

If bad debts in T/B Dr. Side of profit and loss A/c only.

If bad debt in adjustment i. Dr. Side of profit and loss A/c.
ii. Assets side of B/S, less from debtor.

viii. Provision for Bad and Doubtful Debts
At the end of an accounting year, after writing off the bad debt about whom it
is declared irrecoverable, there may still be some customer balances from whom it is
doubtful to collect the total amount. However, it can’t be written off as bad debt because
non recovery of such amount is not certain. Thus, a provision or reserve to such loss is
created to cover any possible loss likely to occur in the near future. Such a provision is
known as the provision for bad and doubtful debts. Such a provision is created at a fixed
percentage on the customers or debtors each year. It is debited in the profit and loss A/c
as a provisional expenditure and deducted from the debtors in the balance sheet.
If a reserve is also created at 5% in addition to the bad debt of 10% on debtors, it is shown
as:
Dr. P & L A/c Cr.
Particulars Amount Particulars Amount
To Salary 2,000
Add: Outstanding +900 2,900
Balance Sheet

Particulars Amount Particulars Amount
Debtors 20,000
Less: New bad debts 2000
18,000
Less: New reserve 900 17,100
Note: The bad debt and provisions/reserve for bad or doubtful debt in the trial balance
are old ones, and the ones given in the adjustments are new. When only old bad debt and
provisions for bad debts are given, then it is better to debit the bad debt and credit the
provision for bad debt in the profit and loss A/c. But when old and new information is given,
then the old bad debt, new bad debt and the new provisions are totalled in the debit side of P
& L A/c in inner column and the old provision is deducted and the net value should be shown
in the outer column. In the above example, debtors, 20,000, bad debt 1,000, provision for bad
debt 1500 are given in the trial balance and adjustment is given as declare further bad debt
at 10% and provision for doubtful debt at 5 % on debtors, the accounting treatment is:

160 Aakar’s Office Practice and Accountancy - 10 Final Accounts 161