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+--- Thread: Provision for doubtful debt (/thread-provision-for-doubtful-debt)
Provision for doubtful debt - posts81 - 05-31-2010
Hi All,
This is my first time on this forum, & I am hoping someone will be able to help me on the below.
Our Accounts Receivable contains a amount of $50,000.00 which is over 90days. The amount will be recovered as we have an agreement. In order to adhere to the reporting requirements I would like to create an provision for the above amount.
Could someone please help me with the journal entries to create a provision, with an explanation.
Thanks
Raj
- Nobin - 06-01-2010
Enteries in the Books of Accounts
When the provision is made, the income statement/ profit and loss account is debited and the provision appears in the balance sheet on liabilities side under the head of current liabilities and provisions. Or it is deducted from the debtors on the asset side. When all efforts of recovering the debts have failed and reasonable time period has passed, the debt is then considered irrecoverable. When a bad debt actually occurs, that is known as bad debt expense, an adjustment entry is made. In income statement, the provision is reduced to the extent of bad debt expenses and corresponding entries are made in the balance sheet. It is important to note here that the effects in P/L account and balance sheet will only be correctly made if the journal entries are correct. In case of actual default the provision account is debited and debtors account is credited. The effect of adjustment entry is shown in both the statements- P/L account and balance sheet, as explained earlier.
- Nobin - 06-01-2010
Step Process Action Accounting entry
1 Identify bad debts Write-off P&L account Dr
Debtors account Cr
2 Forecast potential bad debts Make a provision P&L account Dr
(currently doubtful) Prov for doubtful debts a/c Cr
(with the increase or decrease on the previous year's provision)
3 Estimate cash discount to be availed of by debtors Make a provision P&L account Dr
(for prompt payment) Prov for discount account