Fundamentals of Financial and Cost Accounting · Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Bad Debts and Provision in Final Accounts

Updated 10 October 2026 · Fact-checked

Bad debts are debtors' dues that cannot be recovered. They are a loss, shown on the debit side of the profit and loss account. A provision for doubtful debts is an estimate of future losses. Only the change in provision goes to profit and loss. In the balance sheet, deduct the closing provision from debtors.

Understand Presentation in Final Accounts and Adjustments

A bad debt is an amount owed by a customer that you have decided you will never collect. It is a business loss. It reduces profit in the year it is written off.

A provision for doubtful debts is different. It is an estimate, usually a percentage of debtors, of the loss you expect from debtors still on the books. It follows prudence: you record the likely loss before it happens.

In final accounts, the profit and loss account takes the expense. In the balance sheet, debtors are shown after deducting the provision, so the asset is not overstated. The provision is not a real liability and is not shown on the liabilities side in the usual exam presentation.

The trial balance may already show bad debts and an old provision. The adjustments may add more bad debts and ask for a new provision. You must combine them in the right order. Bad debts are written off first. Then the provision is calculated on the debtors that remain.

Key formulas to remember

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.

How to solve Presentation in Final Accounts and Adjustments questions

Use this order for any final accounts question with bad debts and provision. It prevents double counting.

1List the trial balance items: debtors, bad debts, old provision for doubtful debts, and any bad debts recovered.
2Read each adjustment and note additional bad debts, the new provision rate, and any other related item such as discount.
3Compute total bad debts: trial balance bad debts plus additional bad debts.
4Compute adjusted debtors: trial balance debtors minus additional bad debts.
5Compute the new provision on adjusted debtors using the given rate.
6Find the profit and loss charge: new provision minus old provision. Show bad debts and this net provision charge in the profit and loss account.
7Show in the balance sheet: adjusted debtors less the new provision, as net debtors.
8Add bad debts recovered, if any, on the income side of the profit and loss account.

Quickest way: Four-number shortcut

When to use it: Use this in MCQs asking for net profit effect, the P&L charge or the balance sheet figure for debtors.

Write four numbers: total bad debts, adjusted debtors, new provision, old provision.
Total P&L charge = total bad debts + (new provision − old provision).
Balance sheet debtors = adjusted debtors − new provision.
Check the sign: if the old provision is bigger than the new one, the difference reduces the charge.
Check the options for traps, such as the answer that ignores additional bad debts or uses the old debtors figure.

Common mistakes in Presentation in Final Accounts and Adjustments

Calculating the provision on the original debtors instead of debtors after additional bad debts.
Students read the debtors figure from the trial balance and forget the adjustment.
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.
Students forget the old provision is already in the books from last year.
Fix: Charge only new provision minus old provision. Write both figures before subtracting.
Not adding additional bad debts to the bad debts in the trial balance.
Students treat the adjustment as replacing the trial balance figure.
Fix: Add them. The trial balance figure is already written off. The adjustment is extra.
Showing the provision on the liabilities side of the balance sheet.
Students think of it as an amount owed.
Fix: Deduct it from debtors on the assets side unless the question clearly asks otherwise.
Treating bad debts recovered as a reduction in debtors or ignoring it.
Students confuse it with receipts from current debtors.
Fix: Recovery of an earlier written-off debt is income. Credit it to the profit and loss account.

Worked examples

Example 1

From the trial balance of Sharma Traders on 31 March: Sundry debtors ₹1,00,000; Bad debts ₹3,000; Provision for doubtful debts ₹4,000 (opening). Adjustments: write off further bad debts ₹5,000; maintain provision at 5% on debtors. Show the amounts in the profit and loss account and balance sheet.

Show the solution

Total bad debts = 3,000 + 5,000 = ₹8,000.
Adjusted debtors = 1,00,000 − 5,000 = ₹95,000.
New provision = 5% × 95,000 = ₹4,750.
Old provision = ₹4,000.
Provision charge = 4,750 − 4,000 = ₹750.
Profit and loss account debit: bad debts ₹8,000 and provision increase ₹750, total ₹8,750.
Balance sheet: debtors ₹95,000 less provision ₹4,750 = ₹90,250.

Answer: P&L charge ₹8,750 (bad debts ₹8,000 + provision ₹750). Balance sheet net debtors ₹90,250.

Example 2

Mehta & Co. has debtors ₹60,000, bad debts ₹2,000, opening provision ₹5,000 and bad debts recovered ₹1,000 in the trial balance. Adjustments: additional bad debts ₹4,000; provision at 10% on debtors. Find the net amount charged to profit and loss for these items and the net debtors in the balance sheet.

Show the solution

Total bad debts = 2,000 + 4,000 = ₹6,000.
Adjusted debtors = 60,000 − 4,000 = ₹56,000.
New provision = 10% × 56,000 = ₹5,600.
Provision charge = 5,600 − 5,000 = ₹600.
Bad debts recovered ₹1,000 is income, credited to profit and loss.
Net charge = 6,000 + 600 − 1,000 = ₹5,600.
Net debtors = 56,000 − 5,600 = ₹50,400.

Answer: Net charge to profit and loss ₹5,600. Net debtors in the balance sheet ₹50,400.

Exam tips

Look for the words 'further bad debts' or 'additional bad debts' in adjustments. They signal that debtors must be reduced before the provision is computed.
If the trial balance shows no old provision, the whole new provision is the charge. If the old provision is larger, the difference is a gain.
In MCQs, test the options by computing the adjusted debtors first. Most wrong options come from using the original debtors.
Check whether the question asks for the P&L charge or the balance sheet figure. They are different numbers.
With no negative marking, always attempt every question. Eliminate options that ignore additional bad debts.

Practice questions from Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Presentation in Final Accounts and Adjustments in other exams

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

Presentation in Final Accounts and Adjustments: frequently asked questions

How do you show provision for doubtful debts in the balance sheet?

Show it as a deduction from sundry debtors on the assets side. Debtors after additional bad debts, less the closing provision, give net debtors.

Is the full provision charged to the profit and loss account every year?

No. Only the change is charged. New provision minus old provision is debited if it increases, and credited if it decreases.

What is the difference between bad debts and additional bad debts?

Bad debts in the trial balance are already written off. Additional bad debts are given in the adjustments and must be added to the expense and deducted from debtors.

Where do bad debts recovered go in final accounts?

They are income. Credit them to the profit and loss account in the year of recovery.