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CMA Foundation · Fundamentals of Financial and Cost Accounting

Bad Debts and Provision for Doubtful Debts: CMA Foundation Guide

A bad debt is an amount owed by a debtor that you cannot recover, and it is written off as a loss. A provision for doubtful debts is an estimate of future losses, charged to profit now. To solve questions, adjust debtors first, then apply the percentage, then compare with the old provision.

What this chapter covers

This chapter deals with one problem: some customers who bought on credit will not pay. Accounting handles this in three steps. You write off debts that are certainly lost (bad debts). You create a provision for debts that may be lost (provision for doubtful debts). You may also keep a provision for discount you expect to allow to debtors who pay early.

The chapter links to the final accounts part of the paper. Bad debts and the change in provision are expenses in the Profit and Loss Account. Debtors less provision is shown in the Balance Sheet. The same ideas also appear in trial balance adjustments, rectification of errors and bank-related questions.

The chapter is mostly calculation with a few fixed rules. Once you know the order of steps, MCQs become quick and mechanical. The risk is not difficulty but small slips in the base on which the percentage is applied.

Adjustment questions on final accounts are common in an objective paper, and bad debts and provisions are among the most frequent adjustments. Each MCQ carries 2 marks and there is no negative marking, so a reliable method turns a multi-step question into a sure mark. The same skills help in other chapters that use final accounts, so the effort pays off more than once.

Accounting Treatment of Bad Debts and Provision for Doubtful Debts: topics in the order to study them

  1. 1Bad Debts and Bad Debts RecoveredStart here because it is the simplest entry: a debt is written off, and a later recovery is income.
  2. 2Provision for Doubtful DebtsNext, learn how an estimate is made, how the new provision is compared with the old one, and how the difference reaches the Profit and Loss Account.
  3. 3Provision for Discount on DebtorsThis follows because it uses the same provision logic but with a different base: debtors after deducting bad debts and the doubtful debts provision.
  4. 4Presentation in Final Accounts and AdjustmentsFinish with this because it combines everything: you must apply all adjustments in order and show the right figures in the final accounts.

How to prepare Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Treat this chapter as a short procedure you repeat until it is automatic. Aim for speed and accuracy on the base figure.

  1. Read the basic entries once: bad debts written off, bad debts recovered, and creation of a provision. Understand which side each effect falls on.
  2. Learn the order of steps: adjust bad debts first, then work out the provision on the adjusted debtors.
  3. Practise the provision comparison: new provision minus old provision. If the new one is higher, the difference is an extra charge. If lower, it is a gain.
  4. Solve questions on discount provision. Always check whether the discount is applied after deducting the doubtful debts provision.
  5. Do trial balance style questions. Note whether bad debts appear in the trial balance or in the adjustments, as this changes your working.
  6. Practise Balance Sheet presentation: debtors shown less the provision. Then do timed MCQ sets of 10 questions in 10 minutes.

Common mistakes in Accounting Treatment of Bad Debts and Provision for Doubtful Debts

  • Applying the provision percentage on the unadjusted debtors figure.

    Fix: Always write the adjusted debtors figure on your rough sheet before multiplying.

  • Writing off the full new provision instead of the difference from the old provision.

    Fix: Underline the opening provision in the trial balance and compute new minus old every time.

  • Deducting bad debts twice.

    Fix: Deduct only additional bad debts given in the adjustments. Check where each figure appears.

  • Treating bad debts recovered as a reduction in debtors.

    Fix: Remember that the debt was already written off, so the recovery is separate income.

  • Computing discount provision on the wrong base.

    Fix: Follow the standard order: deduct bad debts, then the doubtful debts provision, then apply the discount percentage.

  • Showing the provision as a liability in the Balance Sheet.

    Fix: Show it as a deduction from debtors on the assets side, unless the question gives another format.

Last-day revision: Accounting Treatment of Bad Debts and Provision for Doubtful Debts

  • 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.

Accounting Treatment of Bad Debts and Provision for Doubtful Debts practice questions

Accounting Treatment of Bad Debts and Provision for Doubtful Debts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting Treatment of Bad Debts and Provision for Doubtful Debts: frequently asked questions

What is the difference between bad debts and provision for doubtful debts?

Bad debts are debts that are certainly lost and are written off now. A provision for doubtful debts is an estimate of losses that may occur in future. The first is an actual loss, the second is a prudent estimate.

Where does the provision for doubtful debts appear in the final accounts?

The change in the provision is charged to the Profit and Loss Account. In the Balance Sheet, the provision is deducted from debtors on the assets side.

How do I treat bad debts recovered in an MCQ?

Treat the recovery as income and credit it to the Profit and Loss Account. Do not change the debtors balance, because the debt was already written off earlier.

On what amount is the provision calculated when there are additional bad debts?

Deduct the additional bad debts from debtors first. Then apply the provision percentage on the remaining balance, unless the question clearly states a different base.

How should I manage time on this chapter in the exam?

Write the steps in a fixed order: adjust debtors, compute the provision, compare it with the old one. Most questions can then be solved in about a minute, and there is no negative marking, so always mark an answer.