Financial Accounting
Bad Debts and Discount on Debtors
Part A: This part contains (1) Definition of bad debts
and provision for bad debts, (2) Rules for making journal entries for bad debts
and provision for bad debts, (3) Rules for making journal entries for discount on
debtors and provision for discount on debtors, and (4) 8 examples for explaining
the rules.
Part B: 5 Illustrations with Solutions.
Bad debts and provision for bad debts
Bad, Doubtful and Good Debts
The amount which is
receivable from a person or a concern for supplying goods or services on credit
is called Debt. Debts may be classified into:
(i)
Bad debts;
(ii)
Doubtful debts; and
(iii)
Good debts.
(i)
Bad Debts:
Bad debts are
uncollectable or irrecoverable debts. In other words, debts which are
impossible to collect are called Bad Debts. If it is definitely known that
amount recoverable from a customer cannot be realized at all, it should be
treated as a business loss and should be adjusted against profit. In short, the
amount of bad debt should be transferred to Profit and Loss Account for the
current year to confirm the principles of matching.
(ii)
Doubtful Debts:
The debts, which
will be receivable or cannot be ascertainable at the date of preparing the
final accounts (i.e., the debts which are doubtful to realise) are known as
doubtful debts. Practically, amount of doubtful debts cannot be treated as a
loss on that particular date, and as such, it cannot be written off. But, it
should be charged against Profit and Loss Account on the basis of past
experience of the firm.
(iii)
Good Debts:
The debts which are
not bad i.e., the debts for which there is neither any possibility of being bad
nor any doubts about its realization, is called good debts. As such, no
provision is necessary for it.
Provision for Bad Debts
Provision for bad debts is an amount that a
company shows on its accounts to represent the money that is owed to it by its
debtors for goods and/or services supplied on credit, and that is unlikely to
be received from such debtors.
Provision for bad
debts is the estimated percentage of total doubtful debt that must be written
off during the next year. It is done because the amount of loss is impossible
to ascertain until it is proved bad. It is nothing but a loss to the company,
which needs to be charged to the profit and loss account in the form of
provision.
RULES FOR MAKING JOURNAL ENTRIES
1. If provision for bad debts account is not
opened, bad debts will be transferred to profit and loss account.
Journal entries:
|
Dt. |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Bad
debts A/c...... |
Dr |
|
|
|
|
To Sundry debtors A/c |
|
|
|
|
|
|
|
|
|
|
2 |
Profit
and loss A/c |
Dr |
|
|
|
|
To Bad debts A/c |
|
|
|
2. If provision
for bad debts account is already existing in the ledger, bad debts will be
transferred to provision for bad debts account.
Journal entries:
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Bad
debts A/c...... |
Dr |
|
|
|
|
To Sundry debtors A/c |
|
|
|
|
|
|
|
|
|
|
2 |
Provision
for bad debts A/c |
Dr |
|
|
|
|
To Bad debts A/c |
|
|
|
3. If provision
for bad debts is to be created
for the first time, it should be created by debiting profit and loss account.
Journal entries:
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Profit
and loss A/c |
Dr |
|
|
|
|
To Prov. for bad debts A/c |
|
|
|
4. Provision for
bad debts account is created
or maintained, as the case may be, with the
amount of provision for bad debts calculated on the year-end closing balance of
debtors (after all necessary adjustments) at a given percentage.
5. If “sundry
debtors” as well as “bad debts” both appear in the trial balance, it implies
that the balance of debtors appearing in the trial balance is as reduced by the
amount of bad debts appearing in the trial balance.
6. If after the
trial balance it is instructed that there is a “further bad debt”, debtors
appearing in the trial balance have to be reduced by the “further bad debt”
before creating or maintaining, as the case may be, the provision for bad debts
account at the end of the accounting year.
Example: 1
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
Create a
provision for bad debts at 5% on sundry debtors and show the necessary journal
entry for the same.
Solution:
Journal entries
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
31.03.12 |
Profit and loss A/c......... |
Dr |
13,000 |
|
|
|
To Prov. for
bad debts A/c |
|
|
13,000 |
Working note:
Provision for bad debts
= Rs 2, 60,000 x 5% = Rs 13,000
Example: 2
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
Write off
further bad debt Rs 10,000. Create a provision for bad debts at 5% on sundry
debtors and show the necessary journal entries for the same.
Solution:
Journal entries
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
31.03.12 |
Bad debt A/c............... |
Dr |
10,000 |
|
|
|
To Sundry
debtors A/c |
|
|
10,000 |
|
31.03.12 |
Profit and loss A/c......... |
Dr |
22,000 |
|
|
|
To Bad
debt A/c |
|
|
22,000 |
|
31.03.12 |
Profit and loss A/c....... |
Dr |
12,500 |
|
|
|
To Prov. for
bad debts A/c |
|
|
12,500 |
Working note:
Provision for bad debts
= (Rs 2, 60,000 – Rs 10,000) x 5%
= Rs 12,500
Example: 3
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
|
Provision for bad debts |
|
20,000 |
Write off further bad debt Rs 10,000. Create
a provision for bad debts at 5% on sundry debtors and prepare:
1. Sundry debtors account,
2. Bad debts account,
3. Provision for bad debts account, and
4. Profit and loss account (extract).
Solution:
Sundry Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
2,60,000 |
31.03.12 |
By B/debts |
10,000 |
|
|
|
|
31.03.12 |
By Bal c/d |
2,50,000 |
|
|
|
2,60,000 |
|
|
2,60,000 |
Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
12,000 |
31.03.12 |
By P/B/D |
22,000 |
|
31.03.12 |
To S/Drs |
10,000 |
|
|
|
|
|
|
22,000 |
|
|
22,000 |
Provision for Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To B/Debts |
22,000 |
31.03.12 |
By Bal b/d |
20,000 |
|
31.03.12 |
To Bal c/d |
12,500 |
31.03.12 |
By P/L A/c |
14,500 |
|
|
|
34,500 |
|
|
34,500 |
Profit and Loss A/c
For the year ended 31.03.12 (extract)
|
Particulars |
Rs
|
Rs
|
Particulars |
Rs
|
Rs
|
|
To Prov. for B/D A/c |
|
|
|
|
|
|
Total bad debt |
22,000 |
|
|
|
|
|
ADD: Cl. Provision |
12,500 |
|
|
|
|
|
LESS: Op. Provision |
(20,000) |
14,500 |
|
|
|
|
|
|
|
|
|
|
Working note:
Provision for
bad debts (closing)
= (Rs 2, 60,000 – 10,000) x 5% = Rs 12,500
Example: 4
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
Write off
further bad debt Rs 10,000. Create a provision for bad debts at 5% on sundry
debtors and prepare:
1. Sundry debtors account,
2. Bad debts account,
3. Provision for bad debts account, and
4. Profit and loss account (extract).
Solution:
Sundry Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
2,60,000 |
31.03.12 |
By B/debts |
10,000 |
|
|
|
|
31.03.12 |
By Bal c/d |
2,50,000 |
|
|
|
2,60,000 |
|
|
2,60,000 |
Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
12,000 |
31.03.12 |
By P/B/D |
22,000 |
|
31.03.12 |
To S/Drs |
10,000 |
|
|
|
|
|
|
22,000 |
|
|
22,000 |
Provision for Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal c/d |
12,500 |
31.03.12 |
By P/L A/c |
12,500 |
|
|
|
12,500 |
|
|
12,500 |
Profit and Loss A/c
For the year ended 31.03.12 (extract)
|
Particulars |
Rs
|
Rs
|
Particulars |
Rs
|
Rs
|
|
To Bad Debts |
22,000 |
|
|
|
|
|
To Prov. For B/Debts |
12,500 |
|
|
|
|
Working note:
Provision for
bad debts (closing)
= (Rs 2, 60,000 – 10,000) x 5%
= Rs 12,500
Discount on debtors and provision for
discount on debtors
RULES FOR MAKING JOURNAL ENTRIES
1. If provision for discount on debtors account is
not opened, discount on debtors will be transferred to profit and loss account.
Journal entries:
|
Dt. |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Discount
on debtors A/c |
Dr |
|
|
|
|
To Sundry debtors A/c |
|
|
|
|
|
|
|
|
|
|
2 |
Profit
and loss A/c |
Dr |
|
|
|
|
To Discount on Drs. A/c |
|
|
|
2. If provision
for discount on debtors account is already existing in the ledger, discount on
debtors will be transferred to provision for discount on debtors account.
Journal entries:
|
Dt. |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Discount
on debtors A/c |
Dr |
|
|
|
|
To Sundry debtors A/c |
|
|
|
|
|
|
|
|
|
|
2 |
Prov.
for discount on Drs. |
Dr |
|
|
|
|
To Discount on Drs. A/c |
|
|
|
3. If provision
for discount on debtors is to be created
for the first time, it should be created by debiting profit and loss account.
Journal entries:
|
Dt. |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
1 |
Profit
and loss A/c |
Dr |
|
|
|
|
To Prov. for discount on debtors |
|
|
|
4. Provision for
discount on debtors account is created
or maintained, as the case may be, with the
amount of provision for discount on debtors calculated on the year-end closing
balance of debtors (after all necessary adjustments), as reduced by the
year-end provision for bad and doubtful debts, at a given percentage.
5. If “sundry
debtors” as well as “bad debts” and “discount on debtors” all appear in the
trial balance, it implies that the balance of debtors appearing in the trial
balance is as reduced by the amount of bad debts and discount on debtors appearing
in the trial balance.
6. If after the
trial balance it is instructed that there is a “further bad debt” and/or
“further discount on debtors”, debtors appearing in the trial balance have to
be reduced by the amount of “further bad debt” and/or “further discount on
debtors” before creating or maintaining, as the case may be, the provision for
bad and doubtful debts account as well as the provision for discount on debtors
account at the end of the accounting year.
Example: 5
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
|
Discount on debtors |
5,000 |
|
Create a
provision for bad debts at 5% on sundry debtors and a provision for discount on
debtors at 2% on sundry debtors. Make necessary journal entries for the above
adjustments.
Solution:
Journal entries
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
31.03.12 |
Profit and loss A/c......... |
Dr |
17,940 |
|
|
|
To Prov. for bad debts A/c |
|
|
13,000 |
|
|
To Provision for discount on debtors A/c |
|
|
4,940 |
Working note:
Provision for bad debts
= Rs 2, 60,000 x 5% = Rs 13,000
Provision for discount on debtors
= Rs (2, 60,000 – 13,000) x 2%
= Rs 4,940
Example: 6
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
|
Discount on debtors |
5,000 |
|
Write off
further bad debt Rs 10,000 and further discount on debtors Rs 4,000. Create a
provision for bad debts at 5% on sundry debtors and a provision for discount on
debtors at 2% on sundry debtors. Make necessary journal entries for the above
adjustments.
Solution:
Journal entries
|
Date |
Particulars |
|
Debit
(Rs) |
Credit
(Rs) |
|
31.03.12 |
Bad debt A/c............... |
Dr |
10,000 |
|
|
|
Discount on debtors A/c |
Dr |
4,000 |
|
|
|
To
Sundry debtors A/c |
|
|
14,000 |
|
31.03.12 |
Profit and loss A/c......... |
Dr |
31,000 |
|
|
|
To Bad
debt A/c |
|
|
22,000 |
|
|
To Discount
on Drs. A/c |
|
|
9,000 |
|
31.03.12 |
Profit and loss A/c....... |
Dr |
16,974 |
|
|
|
To Prov. for
bad debts A/c |
|
|
12,300 |
|
|
To Prov. for discount on debtors A/c |
|
|
4,674 |
Working note:
Prov. for bad debts
= (2, 60,000 – 10,000 – 4,000) x 5%
= Rs 12,300
Prov. for discount on debtors
= (2, 60,000 – 10,000 – 4,000 – 12,300) x 2% = Rs 4,674
Example: 7
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
|
Discount on debtors |
5,000 |
|
|
Provision for bad debts |
|
20,000 |
|
Provision for discount on debtors |
|
8,500 |
Write off
further bad debt Rs 10,000 and further discount on debtors Rs 4,000. Create a
provision for bad debts at 5% on sundry debtors and a provision for discount on
debtors at 2% on sundry debtors. Prepare:
1)
Sundry
debtors account,
2)
Bad
debts account,
3)
Discount
on debtors account,
4)
Provision
for bad debts account,
5) Provision
for discount on debtors account, and
6)
Profit
and loss account (extract).
Solution:
Sundry Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
2,60,000 |
31.03.12 |
By B/debts |
10,000 |
|
|
|
|
|
By Discount
on Drs. A/c |
4,000 |
|
|
|
|
31.03.12 |
By Bal c/d |
2,46,000 |
|
|
|
2,60,000 |
|
|
2,60,000 |
Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
12,000 |
31.03.12 |
By P/B/D |
22,000 |
|
31.03.12 |
To S/Drs |
10,000 |
|
|
|
|
|
|
22,000 |
|
|
22,000 |
Discount on Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
5,000 |
31.03.12 |
By Prov. for Discount on Debtors |
9,000 |
|
31.03.12 |
To S/Drs |
4,000 |
|
|
|
|
|
|
9,000 |
|
|
9,000 |
Provision for Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To B/Debts |
22,000 |
31.03.12 |
By Bal b/d |
20,000 |
|
31.03.12 |
To Bal c/d |
12,300 |
31.03.12 |
By P/L A/c |
14,300 |
|
|
|
34,300 |
|
|
34,300 |
Provision for Discount on Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To
Discount on debtors |
9,000 |
31.03.12 |
By Bal b/d |
8,500 |
|
31.03.12 |
To Bal c/d |
4,674 |
31.03.12 |
By P/L A/c |
5,174 |
|
|
|
13,674 |
|
|
13,674 |
Profit and Loss A/c
For the year ended 31.03.12 (extract)
|
Particulars |
Rs
|
Rs
|
Particulars |
Rs
|
Rs
|
|
To Prov. for B/D A/c |
|
|
|
|
|
|
Total bad debt |
22,000 |
|
|
|
|
|
ADD: Cl. Provision |
12,300 |
|
|
|
|
|
LESS: Op. Provision |
(20,000) |
14,300 |
|
|
|
|
To Prov. for discount on Debtors A/c |
|
|
|
|
|
|
Total discount on Drs. |
9,000 |
|
|
|
|
|
ADD: Cl. Provision |
4,674 |
|
|
|
|
|
LESS: Op. Provision |
(8,500) |
5,174 |
|
|
|
|
|
|
|
|
|
|
Working notes:
Provision for bad debts (closing)
= (2, 60,000 – 10,000 – 4,000) x 5%
= Rs 12,300
Prov. for discount on debtors (closing)
= (2, 60,000 – 10,000 – 4,000 – 12,300) x 2% = Rs 4,674
Example: 8
Trial balance as on 31st March, 2012
|
Heads
of account |
Debit
(Rs) |
Credit
(Rs) |
|
Sundry debtors |
2,60,000 |
|
|
Bad debt |
12,000 |
|
|
Discount on debtors |
5,000 |
|
Write off
further bad debt Rs 10,000 and further discount on debtors Rs 4,000. Create a
provision for bad debts at 5% on sundry debtors and a provision for discount on
debtors at 2% on sundry debtors. Prepare:
1)
Sundry
debtors account,
2)
Bad
debts account,
3)
Discount
on debtors account,
4)
Provision
for bad debts account,
5) Provision
for discount on debtors account, and
6)
Profit
and loss account (extract).
Solution:
Sundry Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
2,60,000 |
31.03.12 |
By B/debts |
10,000 |
|
|
|
|
|
By Discount
on Drs. A/c |
4,000 |
|
|
|
|
31.03.12 |
By Bal c/d |
2,46,000 |
|
|
|
2,60,000 |
|
|
2,60,000 |
Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
12,000 |
31.03.12 |
By P/B/D |
22,000 |
|
31.03.12 |
To S/Drs |
10,000 |
|
|
|
|
|
|
22,000 |
|
|
22,000 |
Discount on Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal b/d |
5,000 |
31.03.12 |
By Prov. for Discount on Debtors |
9,000 |
|
31.03.12 |
To S/Drs |
4,000 |
|
|
|
|
|
|
9,000 |
|
|
9,000 |
Provision for Bad Debts A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal c/d |
12,300 |
31.03.12 |
By P/L A/c |
12,300 |
|
|
|
12,300 |
|
|
12,300 |
Provision for Discount on Debtors A/c
|
Date |
Particulars |
Rs
|
Date |
Particulars |
Rs
|
|
31.03.12 |
To Bal c/d |
4,674 |
31.03.12 |
By P/L A/c |
4,674 |
|
|
|
4,674 |
|
|
4,674 |
Profit and Loss A/c
For the year ended 31.03.12 (extract)
|
Particulars |
Rs
|
Rs
|
Particulars |
Rs
|
Rs
|
|
To Bad debts |
22,000 |
|
|
|
|
|
To Discount
on debtors |
9,000 |
|
|
|
|
|
To Prov. for bad
debts |
12,300 |
|
|
|
|
|
To Prov. for
discount on Drs. |
4,674 |
|
|
|
|
|
|
|
|
|
|
|
Working notes:
Provision for bad debts (closing)
= (2, 60,000 – 10,000 – 4,000) x 5%
= Rs 12,300
Prov. for discount on debtors (closing)
= (2, 60,000 – 10,000 – 4,000 – 12,300) x 2% = Rs 4,674
Part B
Financial Accounting
Bad Debts and Discount on Debtors
Selected Problems
Illustration:
1
Prepare Bad Debts
Accounts, Provision for Bad Debts Accounts, Profit and Loss Accounts and
Balance sheets from the following information:-
|
|
|
Rs |
|
01.01.2012 |
Provision for bad
debts |
5,000 |
|
31.12.2012 |
Bad debts written
off |
3,000 |
|
|
Sundry Debtors |
1,25,000 |
|
31.12.2013 |
Bad debts written
off |
2,500 |
|
|
Sundry Debtors |
1,00,000 |
Provisions for bad
debts are to be made @ 5% for 2012 and @ 2.5% for 2013.
Illustration:
2
On 01.01.2013 the balance
of Provision for doubtful debts was Rs 5,000. The Bad Debts during the year
were Rs 900. The Sundry Debtors as on 31.12.2013 stood at Rs 40,400 out of
these debtors of Rs 400 are bad and cannot be realized. The Provision for Doubtful
Debts is to be raised to 5% on Sundry Debtors. Show the necessary ledger accounts
and the balance sheet.
Illustration:
3
On 01.04.2012, M/s
Singh Bros. had a provision for bad debts of Rs 6,500 against their book debts.
During 2012-13, Rs 4,200 proved irrecoverable and it was desired to maintain
the provision for bad debts @4% on debtors which stood at Rs 1, 95,000 before
writing off Bad Debts. They also decided to maintain a provision for discount
on debtors @2%. Show Provision for Bad Debt Account and Provision for Discount
on Debtors Account as would appear in the books of the firm in 2012-13.
Illustration:
4
A company maintains
its reserve for bad debts @ 5% and a reserve for discount on debtors @ 2%. You
are given the following details:
|
|
2012 (Rs) |
2013 (Rs) |
|
Bad debts |
800 |
1,500 |
|
Discount allowed |
1,200 |
500 |
Sundry debtors
(before providing all bad debts and discounts) amounted to Rs 60,000 on
31.12.2012 and Rs 42,000 on 31.12.2013.
On 1.1.2012,
Reserve for bad debts and Reserve of discount on debtors had balance of Rs
4,550 and Rs 800 respectively.
Show Reserve for
Bad Debts Account and Reserve for Discount on Debtors Account.
Illustration:
5
On 31.12.2012,
Sundry Debtors and Provision for Doubtful Debts are Rs 50,000 and Rs 5,000 respectively.
During the year 2013, Rs 3,000 are bad and written off. On 30.9.2013, an amount
of Rs 400 was received on account of a debt which was written off as bad last
year. On 31.12.2013, the debtors left was verified and it was found that sundry
debtors stood in the books were Rs 40,000 out of which a customer Mr. X who
owed Rs 800 was to be written off as bad.
Prepare Bad Debts
A/c and Provision for Bad Debts A/c as on 31.12.2013 assuming that same
percentage should be maintained for provision for bad debts as it was on
31.12.2012.
Show also how the
above transactions will appear in Profit & Loss A/c and Balance Sheet.
Click here for Solution: 5 in PDF
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