Question

2) On 1 January 2005 there was a balance of $1000 in the provision for doubtful debts account, and it was decided to maintain the provision at 10% of the debtors at each year end. The debtors on 31 December each year were: • 2005=24,000 • 2006=16,000 • 2007=16,000 Show the necessary entries for the three years ended 31 December 2005 to 2007 inclusive in the following: 1) Provision for doubtful debts accounts (ii) Profit & loss accounts. (2b) What is the difference between bad debts & provision for doubtful debts?

Answer 1

Calculation of provision for doubtful debts accounts

Year Balance of Debtors Required Provision   Current Balance More provision to be made

2005 24,000   24,000*10%=2,400 1,000 1,400

2006 16,000 16,000*10%=1,600 2,400 (800)

2007 16,000 16,000*10%=1,600 1,600 -

Journal Entries

2005

Profit and Loss Account Dr. 1,400

To Provision for doubtful debts accounts 1,400

2006

Provision for doubtful debts accounts Dr. 800

To Profit and Loss Account   800

2007

No entry required because current balance is equal to required balance

Difference between bad debts and provision for doubtful debts accounts

Provision for doubtful debts accounts is created when management estimates that in future there is a probability of a debt turning bad i.e. business would not be able to recover the amount. In such cases provision is made.

Bad debts on other hand are debited when management is certain that they won't be able to recover the amount then the bad debts is recognised as loss.