Accounting-debit/credit entries for bad debts, provision for bad debts and debtors?
My book doesn't answer these questions. I mean I am asked to adjust the provision for bad debts to 10% of the closing debtors which increases my provision by £300, so thats a credit entry, right? then what? does that go in the Income statement and increases bad debts or does that reduce my debtors? And another question, extra bad debts-dbt bad debts expense, does that mean i need to credit the debtors? if you can answer these questions and if you have any other things about this which are essential to understand the bad debts stuff, I would be really grateful. Thanks a million.
Higher Education (University +) - 1 Answers
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Answer 1 :
By increasing your bad debt provision (in the balance sheet) by £300 you are right in stating that the credit entry in the balance sheet is to post £300 to your bad debt provision account. The debit entry for £300 will be posted to the bad debt account in the profit and loss account (income statement). As far as the second part of your question is concerned you must differentiate between a bad debt provision (as described above) and a bad debt write off. A bad debt provision is merely providing for any possible future bad debts in compliance with the prudence concept. These bad debts may not actually materialise and you may in future periods actually reduce you bad debt provision. This would lead to the opposite effect to what was described above, ie. a debit entry in the bad debt provision account and a credit entry in the profit and loss account. However, with a bad debt write off you would credit the debtor account directly (ie. make no entry at all in the bad debt provision account). This will reduce the debtor balance permanently. The debit entry would, however, be the same as in the bad debt provision scenario, ie. a debit entry to the bad debt account in the profit and loss account. I hope the above makes sense.
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