CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Treatment of Bad Debts and Provision for Doubtful Debts
Which statement about bad debts under the accrual system of accounting is correct?
Bad debts are a revenue loss and are debited to the Profit and Loss Account. They arise from the regular business activity of selling on credit, so they are an operating expense of the period and not a capital item or a balance sheet liability.
- ABad debts are a capital loss and are shown on the liabilities side of the Balance Sheet
- BBad debts are a revenue loss and are debited to the Profit and Loss AccountCorrect
- CBad debts are recorded only when cash is received from the debtor
- DBad debts are added to the sales figure in the Trading Account
Explanation
Bad debts arise from normal credit sales, so they are a revenue loss and are charged to Profit and Loss Account. They are not capital items, and they are not linked to cash receipts. They are not added to sales.
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