bad debts and provision for bad debts呆账坏.ppt

Bad debts and Provision for Bad debts Bad Debts When the firm finds that it is impossible to collect a debt, that debt should be written off as a bad debt. Accounting Entries: Example During the year, a company sold goods for $2,000 to Mr. Lee, $1,500 to Mr.Wong and $300 to Mr. Wu. Mr. Lee and Mr. Wong paid the company $800 and $1,000 respectively Later, Mr. Wong and Mr. Wu became bankrupt, and it is impossible for the company to collect these debts. The company decided to write these off as bad debts. B. Provision for Bad / Doubtful Debts A provision for bad and doubtful debts may be made when a firm thinks that there will be problems in recovering a debt. Accounting entries Increase in provision for bad debts Example A firm decided to make a provision for bad debts at 10% of the debtors’ accounts which totalled $50,000 on 31 December 1994. On 31 December 1995, the debtors accounts totalled $60,000. The firm maintained the provision at 10% of its total debtors. Decrease in Provision for bad debts Example The debtors’ accounts on 31 December 1996 totalled $40,000. The firm decided to maintain the provision at 10% of the total debtors. C. Bad Debts Recovered Bad debts recovered refers to debts formerly written off to be recovered later. Example The following balances were part of the trial balance of Mr. Chan on 31 December 1996: $ Debtors 10,000 Bad Debts 1,000 During the year, Mr. Chan received $300 and $1,200 from debtors, whose debts had been previously written off as bad debts in the current year and last year respectively. No entry has been made for these transactions * * Dr Bad Debts Cr Debtor With the irrecoverable amount of a debt Mr. Lee $ $ Bank 800 Mr. Wong $ $ Sales 1,500 Bank 1,000 Sales 2,000 2,000 2,000 Balance c/f 1,200 Bad Debts 500 Mr. Wu $ $ Sales 300 Bad Debts 300 Bad Debts $ $ Mr.