Doubtful Debt Accounting

Doubtful Debt Accounting

In this article we would discus the doubtful debt accounting. Those Debts which are looking difficult to collect is known as doubtful debt.  Possible reasons of doubtful debt includes

a)    Heavy losses of customer.

b)   Major Share of  business lost.

c)    Problems with Government.

d)   Problems with Trade union.

e)    etc

Journal Entry for Doubtful Debt

Doubtful debt is recognized as expense and against which a liability is created, because amount of the expense would be confirmed in future. For example, we expect that 10,000 of debt would not be recovered from a customer.

Date	Particulars	Dr	Cr
	Doubtful Debt A/c	10,000
	Provision for Doubtful Debt A/c		10,000

Doubtful Debt accounting Nature

a)    No entry in receivable account for provision creation.

b)   There is concept of increase and decrease in provision (next years).

c)    An increase would be debited to profit & loss.

d)   A decrease would credit to profit & loss.

Journal entry for increase in Provision

Increase in provision (increased amount) is debited to profit & loss and provision for doubtful is increase (credited).

Last Year Provision        10,000

Current Year Provision   12,000

Increased Provision         2,000

Date	Particulars	Dr	Cr
	Doubtful Debt A/c	2,000
	Provision for Doubtful Debt		2,000

Journal entry for Decrease in Provision

Decrease in provision is credited to profit & loss account (as income) and provision is decreased (debited).

Last Year Provision        10,000

Current Year Provision     8,000

Decreased Provision         2,000

Date	Particulars	Dr	Cr
	Provision for Doubtful Debt	2,000
	P&L (Doubtful Debt)		2,000

Bad Debt & Doubtful Debt Combined

Bad Debt = 5,000

Provision Last Year = 10,000

Provision Current Year = 14,000

Solution

As provision for doubtful debt increase from 10,000 to 14,000. Thus further provision is created by debiting the doubtful debt and crediting the provision.

Date	Particulars	Dr	Cr
	Doubtful Debt A/c	4,000
	Provision for Doubtful Debt		4,000

Bad debt reporting this year are write off by debiting the bad debt and crediting the receivable a/c. 

Date	Particulars	Dr	Cr
	Bad Debts Debt A/c	5,000
	Receivable account  A/c		5,000

Based on the above entries the total amount charged to profit & loss account is 9,000 ( bad debt write off 5000 + Increase in provision 4000 ).

Bad Debt Accounting

Bad Debt Accounting:

Bad debt is that part of receivable that company would not be able to receive or recover from the customer. The following are the main reason for bad debt

a)    Solvency of Debtor.

b)   Death of Debtor (Debtor left over asset are not sufficient to recover debt).

c)    Dispute with the customer (Damaged Goods).

d)   Fraud Customer.

Accounting for Bad Debt:

Bad debt is treated as operational expenditure of the company and amount of bad debt is deducted from the receivable. Thus bad debt is debited being expense, and receivables are credited being reduction in asset.

Journal entry for the Bad debt would be as follow

Date	Particulars	Dr	Cr
	Bad Debt (P&L) A/c	5,000
	Receivable A/c		5,000

Bad Debt Recovery Accounting:

There is always a possibility that customer would pay its debt liability, that was previously written off by the company. In such cases the recovered amount is charged as income in the period of recovery. 

In case the amount written down above is recover in next period, then journal entry for such recovery would be as under

Cash is debited being increase in asset, and profit & loss account is credited treating the recover as income.

Date	Particulars	Dr	Cr
	Cash A/c	5,000
	Profit & Loss A/c		5,000

Discount Received Accounting

Discount Received Accounting

In this article we would discuss discount received accounting. Discount received are discount allowed by the creditor on early payment. The discount received is treated as income for the business. Discount is credited being an income and Trade payable is debited as result of reduced liability.

Discount received will reduce the individual creditor (who gave discount) and total creditor/payable liability. It is important to note that discount received shall have no impact /affect on purchases. Some characteristics of discount received are listed below

a)    Discount received is an income.

b)   Discount received will reduce the creditor account.

c)    Discount received have no impact on Purchases.

d)   Discount received will be debited & Debtor account is credited.

Discount Received Accounting Example

Credit Purchases from Ahmed Khan = 200,000

Discount received= 10%

What would be journal entry for discount received?

Solution

In first step , we would record the purchases to creditor by debiting purchases account and crediting creditor account. In second step we would record the discount at the time of payment to creditors.

General Journal

Purchases Entry at time of purchases. In this entry purchases are debited being the increase in expense, while creditor account was credited being increase in liabilities.

Date	Particulars	Dr	Cr
	Purchases A/c	200,000
	Ahmed Khan A/c		200,000

Discount Entry at time of payment.i 

Date	Particulars	Dr	Cr
	Ahmed Khan A/c	40,000
	Discount received A/c		40,000

General Ledger

Now we post the above journal entries in T accounts of ledger. Purchases account will be debited in the light of journal entry, similarly discount received account will be credited. Ahmed account will be first credited for purchases and then debited for discount. This updated status is shown below

                                             Purchases Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Ahmed a/c	200,000		Balance	200,000
		200,000			200,000

                                        Discount Received Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Balance	40,000		Ahamed Khan	40,000
		40,000			40,000

                                             Ahmed Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Discount	40,000		Purchases	200,000
	Balance	160,000
		100,000			100,000

Trial Balance

Now closing balances of T Accounts are transferred to trial balance. In trial balance the discount received appearance on credit side reflects its nature as income.

Account	Dr.	Cr.
Purchases	200,000
Discount Received		40,000
Debtor		160,000
	200,000	200,000