Accounting Treatment of Bad Debts and Provision for Doubtful Debts: formula sheet

Key formulas

Writing off a bad debt

Bad Debts A/c Dr. | To Debtor's A/c

Debit the loss, credit the debtor. Use the amount that cannot be collected.

Recovery of a debt written off

Cash/Bank A/c Dr. | To Bad Debts Recovered A/c

Credit is an income. Do not credit the debtor's account if the debt was already written off.

Partial payment from insolvent debtor

Bank A/c Dr. (amount received) | Bad Debts A/c Dr. (balance) | To Debtor's A/c (total due)

Bad debt = Amount due − Amount received.

Transfer at year end

Profit and Loss A/c Dr. | To Bad Debts A/c ; Bad Debts Recovered A/c Dr. | To Profit and Loss A/c

Bad debts is a loss. Bad debts recovered is a gain.

Debtors on Balance Sheet

Closing Debtors = Opening Debtors + Credit Sales − Cash received − Returns − Bad debts

Bad debts reduce debtors. Bad debts recovered does not affect the debtors balance.

Required provision

New provision = Closing debtors (after further bad debts) × Rate of provision

If the rate is given on debtors, apply it to debtors only. Do not include bills receivable unless asked.

Creating the provision

Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c

Passed for the new provision in the first year.

Charge for the year

Charge to P&L = Bad debts + New provision − Old provision

Here, bad debts means the total bad debts charged to P&L, including further bad debts. The formula leaves out bad debts recovered, which is a gain and is deducted separately if given. Positive result is an expense. Negative result is a gain. Use this when old provision exists.

Increase in provision

Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c (for the increase only)

Applies when new provision is greater than old provision.

Decrease in provision

Provision for Doubtful Debts A/c Dr. To Profit and Loss A/c (for the decrease only)

Applies when new provision is less than old provision. It is a gain.

Balance sheet presentation

Net debtors = Sundry debtors − Provision for doubtful debts

Show the provision as a deduction from debtors.

Base for discount provision

Good debtors = Debtors − Bad debts − Provision for doubtful debts

Use closing debtors after adjusting for the bad debts given in the question.

Provision for discount

Provision = Good debtors × Rate of discount ÷ 100

Rate is given as a percentage of the good debtors.

Charge to Profit and Loss

Charge = New provision − Old provision (if new is higher)

If new is lower, the difference is a gain, credited to Profit and Loss.

Entry to create or increase

Profit and Loss A/c Dr. ; To Provision for Discount on Debtors A/c

Pass for the amount of the increase only.

Entry to reduce

Provision for Discount on Debtors A/c Dr. ; To Profit and Loss A/c

Pass for the amount of the decrease.

Total bad debts charged

Bad debts in trial balance + Additional bad debts (adjustment)

Both go to the debit side of the profit and loss account. Additional bad debts also reduce debtors.

Debtors for provision (good debtors base)

Debtors in trial balance − Additional bad debts

Calculate the new provision on this figure, not on the original debtors.

New provision

Rate % × (Debtors − Additional bad debts)

If the question gives a rate on debtors, apply it after deducting additional bad debts.

Charge to profit and loss for provision

New provision − Old provision

If positive, it is an expense. If negative, it is a gain (reduction in provision) shown as a credit or deducted from expenses.

Balance sheet display

Debtors (after additional bad debts) − Closing provision = Net debtors

Show the provision as a deduction from debtors on the assets side.

Bad debts recovered

Credited to profit and loss account as income

Amounts received later on debts written off in an earlier year are income of the year of recovery.

Quick revision

• A bad debt is a loss and is debited to the Profit and Loss Account.
• Bad debts recovered later are income and are credited to the Profit and Loss Account.
• A debt written off in an earlier year and recovered now is not added back to debtors.
• Provision for doubtful debts is an estimate of future loss, not an actual loss.
• Charge to profit = new provision + total bad debts − old provision (and less any recovery). Here, total bad debts means the bad debts in the trial balance plus any additional bad debts given in the adjustments.
• Apply the provision percentage on debtors after deducting additional bad debts.
• Provision for discount is usually calculated on debtors after deducting bad debts and the doubtful debts provision.
• In the Balance Sheet, show debtors less the provision.
• If bad debts are already in the trial balance, do not deduct them again from debtors.
• If the question says additional bad debts, deduct them from debtors and charge them to profit.
• Read whether the percentage is on total debtors or only on good debtors before calculating.

Common mistakes

• Crediting the debtor's account when a written-off debt is recovered. Fix: If the debt was already written off, the debtor's account is closed. Credit Bad Debts Recovered A/c.
• Treating Bad Debts Recovered as a reduction of debtors. Fix: The debtor was already removed at write-off. The recovery is a separate income.
• Calculating the provision on debtors before deducting further bad debts. Fix: Always reduce debtors by further bad debts first, then apply the rate.
• Charging the whole new provision to P&L when an old provision exists. Fix: Charge only new minus old. Look for the old provision in the trial balance.
• Calculating the discount provision on total debtors. Fix: Always deduct bad debts and the doubtful debts provision first, in that order.
• Charging the whole new provision to Profit and Loss when an old provision exists. Fix: Charge only the difference between the new and the old provision.
• Calculating the provision on the original debtors instead of debtors after additional bad debts. Fix: Always deduct additional bad debts first. Then apply the percentage.
• Charging the full new provision to profit and loss when an old provision exists. Fix: Charge only new provision minus old provision. Write both figures before subtracting.

Exam tips

• Look for the words 'previously written off' or 'recovered'. They signal a credit to Bad Debts Recovered.
• In partial payment questions, calculate the bad debt from the rupee rate first, then pick the option.
• Remember that Bad Debts Recovered does not change the closing debtors figure.
• Check carefully whether the question asks for the amount of bad debt or the amount received. They are different numbers.
• Read the adjustments line by line. Look for further bad debts before you touch the rate.
• Check the trial balance for an existing provision. Its presence changes the answer in many MCQs.
• Note whether the question asks for the charge to P&L, the closing provision or net debtors. These are three different numbers.
• Quickly eliminate options that equal the full new provision when an old provision exists.