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

Characteristic of Cash Discount Allowed

Characteristic of Cash Discount Allowed

Cash discounted is allowed by the company to motivate customer for early payment.

Important Characteristics of Cash Discount

Some important characteristics of cash discount allowed are discussed below;

1.   Time of Recovery:

Cash discount is offered to customer on early payment or recovery of due amount from customers. This discount is recorded in the books of accounts at the time of recovery of due payment from the customers.

2.   Working Capital Management:

Cash discount facilities working capital management. Organization needs cash to finance the operations of the business. Discount allowed work as motivating factor for early recovery.

3.   Cash discount Allowed is Expense:

Cash discount allowed is treated as expense in the business. Thus discount allowed is debited in the books of account.

4.   Accounting Treatment of Cash Discount:

Cash discount is debited being expenses, while debtor is reduced by crediting. This accounting treatment has been explained with a simple example below

5.   Examples of Discount allowed:

Accounting treatment of discount allowed has been the following example. Sales made to Raheel amounting 120,000 and 10% discount is allowed on early payment, and then the following journal entry shall be passed by company.

Date	Particulars	Dr	Cr
	Raheel Khan A/c	120,000
	Sales		120,000

Date	Particulars	Dr	Cr
	Discount Allowed A/c	12,000
	Raheel Khan A/c		12,000

 6.   List of Characteristics of Discount allowed

a)    It is given to customers.

b)   It is a business expense.

c)    It improves the working capital of company.

d)   It is quite different from trade discount.

Discount Allowed Accounting

Discount Allowed Accounting

In this article we would discuss the discount allowed accounting.This Discount is offered to customer on early payment. The discount allowed is treated as expense for the business. Discount is debit and account receivable is credited. 

Discount allowed will reduce the individual customer and total receivable account. It is important to note that discount allowed shall not affect sales. Accounting treatment of discount allowed can be summarized as follow

a)    Discount allowed is an expense.

b)   Discount allowed will reduce the debtor account. (To whom discount given).

c)    Discount allowed have no impact on sales.

d)   Discount allowed will be debited and Debtor account is credited.

Discount Allowed Accounting Example

Credit Sales= 100,000

Discount allowed= 5%

What would be journal entry for discount allowed?

Solution

General Journal

At the time of sales , debtor will be debited being increase in asset and sales will be credited being increase in income. The recording of this entry is shown below

Date	Particulars	Dr	Cr
	Faheem Khan A/c	100,000
	Sales		100,000

At the time of discount allowed on early payment, discount allowed will be debited being increase in expenses and debtor is credited being decrease in asset.This entry is shown as under

Date	Particulars	Dr	Cr
	Discount Allowed A/c	5,000
	Faheem Khan A/c		5,000

General Ledger

The above two journal entry are posted below in the T accounts. The below sales account clearly shows that discount allowed has no effect on sales  (not charged to sales), rather it reduces the receivables.

                                             Sales Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	P&L	100,000		Faheem Khan	100,000
		100,000			100,000

                                               Discount Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Faheem	5,000		Profit & loss	5,000
		5,000			5,000

                                                     Faheem Khan Account

Date	Particulars	Dr.	Date	Particulars	Cr.
	Sales	100,000		Discount	5,000
				Balance	95,000
		100,000			100,000

Trial Balance

The following trial balance can be extracted from the above T Accounts. The trial balance shows the discount as debit balance being expense.

Account	Dr.	Cr.
Sales		100,000
Discount Allowed	5,000
Debtor	95,000
	100,000	100,000