kpmbm - bad debts and doubtful debts
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Ahmad Hafiz Zainal AbidinM Acc (UiTM), B. Acc (Hons) UiTM, Dip. Ed (MPPP)
Department of Accounting and Quantitative
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The inclusion of a degree of caution in the exerciseof the judgement needed in making the estimates
required under conditions of uncertainty
Wood & Sangster, 2008
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Assets and income are not overstated
Liabilities and expenses are not understated
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Non-current AssetsBuildings and premises 500,000
Fixtures and fittings 120,000
Machineries and equipments 100,000
720,000Current AssetsInventories 80,000
Debtors 100,000
Cash at Bank 70,000
Cash in hand 45,000295,000
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Non-current AssetsBuildings and premises 500,000
Fixtures and fittings 120,000
Machineries and equipments 100,000
720,000Current AssetsInventories 80,000
Debtors 100,000
Cash at Bank 70,000
Cash in hand 45,000295,000
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Why commercials offer sales on credit to theircustomers?
To offer flexibilities in payment to customers.
Encourage customers to buy (purchasing power).
To gain advantage in business competition.
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Businesses offer sales on credit to its customers.The business therefore taking risk that some ofthese customers (debtors) may never pay for thegoods sold to them.
In the events of uncollectible debts, these debtsmust be written-off from the assets accounts andcharged to income statement.
The uncollectible debts is called as bad debts.
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On 10 August 2011, sold goods RM2,500 on credit toTCS Sdn Bhd.
TCS Sdn Bhd
Sales
2011
Aug 1o Sales 25,000
Aug 1o TCS Sdn Bhd 25,0002011
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On 31 August 2011, TCS Sdn Bhd was declaredbankrupt and has to be written-off as bad debts.
TCS Sdn Bhd
Sales
2011
Aug 1o Sales 25,000
Aug 1o TCS Sdn Bhd 25,0002011
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On 31 August 2011, TCS Sdn Bhd was declaredbankrupt and has to be written-off as bad debts.
TCS Sdn Bhd
Bad Debts
2011
Aug 1o Sales 25,000
Aug 31 TCS Sdn Bhd 25,0002011
Aug 31 Bad Debts 25,000
2011
25,000 25,000
2011Dec 31 Profit & Loss 25,000
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Sometimes, a debt written-off in previous years isrecovered. When this happens, the debt must bereinstate in the accounts by making the followingentries:
Debit Debtors / Account Receivables
Credit Bad Debts Recovered(revenues)
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To show in the balance sheet a figure for accountsreceivable as close as possible to the true value ofaccounts receivable at the balance sheet date.
Thus, an estimation that some of the reportedaccounts receivable may be uncollectible in thefuture (become bad debts) must be incorporated inthe account / financial statements prudenceconcept.
This estimation is called as Allowance for Doubtful
Debts
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A debtor who owed RM500 to the company was declaredbankrupt at the year end and this amount has to be written-off.
Accounts Receivable
Bad Debts
2010
Dec 31 Balance b/d 70,500 Dec 31 Bad debts 500
2010
2010Dec 31 Acc. Receivable 500
Dec 31 Balance c/d 70,000
70,50070,500
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The company has decided to provide 10% of the net debtors asallowance for doubtful debts.
Accounts Receivable
2010
Dec 31 Balance b/d 70,500 Dec 31 Bad debts 500
2010
Dec 31 Balance c/d 70,000
70,50070,500
The allowance for doubtful debts are as follows:
10% x RM70,000 = RM7,000Net
debtors
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The double entries to record the increases in Allowance for
doubtful debts:Debit Income StatementCredit Allowance for doubtful debts
Accounts Receivable
Allowance for doubtful debts
2010
Dec 31 Balance b/d 70,500 Dec 31 Bad debts 500
2010
2010Dec 31 Income Statement 7,000
Dec 31 Balance c/d 70,000
70,50070,500
7,0007,000
Dec 31 Balance c/d 7,0002010
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Income Statement (extract) for the year ended 31 Dec 2010
Expenses
Increase in provision for doubtful debts 7,000
Balance Sheet (extract) as at 31 Dec 2010
Add Current Assets
Accounts receivable / debtors 70,000less : Allowance for D. Debts 7,000 63,000
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The balances in the account of Taza Sdn Bhd as at 31 December
2010 were as follows:
Accounts receivable RM85,300
Additional Information
1. A debtor amounted RM800 was declared bankrupt and to bewritten-off.
2. An allowance for doubtful debts is to be provided at 5% ofthe net debtors.
REQUIREDShow the following:
i. Accounts receivable and allowance for doubtful debts
ii. Income Statement and balance sheet as at 31 Dec 2010
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Net debtors = debtors bad debts written-off= 85,300 800
= 84,500
Allowance for doubtful debts
= 5% x 84,500
= 4,225
(increase in allowance for doubtful debts)
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Accounts Receivable
Allowance for doubtful debts
2010
Dec 31 Balance b/d 85,300 Dec 31 Bad debts 800
2010
2010Dec 31 Income Statement 4,225
Dec 31 Balance c/d 84,500
85,30085,300
4,2254,225
Dec 31 Balance c/d 4,2252010
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Income Statement (extract) for the year ended 31 Dec 2010
Expenses
Increase in provision for doubtful debts 4,225
Balance Sheet (extract) as at 31 Dec 2010
Add Current Assets
Accounts receivable / debtors 84,500less : Allowance for D. Debts 4,225 80,275
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Count the black dot
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Do you think the vertical line is straight or curve?
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Which of the center dot is bigger?
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What do you see?
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Read the passage quick and loud
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When a company provide allowance for doubtfuldebts annually, the amount of provisions fordoubtful debts would change as reflect to theamount of debtors at the year end or the rate of
estimation.
Example:
Year Debtors Provisions for D. Debts
2001 100,000 10% x 100,000 = 10,0002002 120,000 10% x 120,000 = 12,000
2003 110,000 10% x 110,000 = 11,000
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Decreases in
Allowance for
Doubtful Debts
is a revenue
Increases in
Allowance forDoubtful Debts
is an expense
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The account balances for Rahmad Trading as at 30 June 2011were as follows:
Accounts Receivables RM36,000
Provisions for Doubtful Debts 1,200
Bad Debts written-off 1,000
Additional information:
1. Bad debts to be written-off as at 30 June 2011 is RM600
2. Allowance for doubtful debts is to be provided at 5% on netdebtors.
REQUIREDShow the relevant accounts and extract financial statements.
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Net debtors = debtors bad debts written-off= 36,000 600
= 35,400
Allowance for doubtful debts
= 5% x 35,400
= 1,770
Increase in allowance for doubtful debts
= 1,770 1,200= 570
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Accounts Receivable
Allowance for Doubtful Debts
2011
June 30 Balance b/d 36,000 June 30 Bad Debts 600
2011
June 30 Balance c/d 35,400
36,000 36,000
2011 2011
June 30 Balance b/d 1,200
June 30 Balance c/d 1,770 June 30 Income statement 570
1,770 1,770
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Income Statement (extract) for the year ended 30 June 2011
Expenses
Bad debts 1,600
Increase in provision for doubtful debts 570
Balance Sheet (extract) as at 30 June 2011
Add Current AssetsAccounts receivable / debtors 35,400less : Allowance for D. Debts 1,770 33,630
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The account balances for Rahmad Trading as at 30 June 2011were as follows:
Accounts Receivables RM35,000
Provisions for Doubtful Debts 2,200
Bad Debts written-off 1,000
Additional information:
1. Bad debts recovered as at 30 June 2011 is RM1,000
2. Allowance for doubtful debts is to be provided at 5% on netdebtors.
REQUIREDShow the relevant accounts and extract financial statements.
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Net debtors = debtors + bad debts recovered= 35,000 + 1,000
= 36,000
Allowance for doubtful debts
= 5% x 36,000
= 1,800
Decrease in allowance for doubtful debts
= 2,200 1,800= 400
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Accounts Receivable
Allowance for Doubtful Debts
2011
June 30 Balance b/d 35,000
June 30 B. Debts Recovered 1,000
2011
June 30 Balance c/d 36,000
36,000 36,000
2011 2011
June 30 Balance b/d 2,200
June 30 Balance c/d 1,800
June 30 Income statement 400
2,200 2,200
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Income Statement (extract) for the year ended 30 June 2011Revenues
Bad debts recovered 1,000
Decreases in provision for doubtful debts 400
ExpensesBad debts 1,000
Balance Sheet (extract) as at 30 June 2011
Add Current Assets
Accounts receivable / debtors 36,000
less : Allowance for D. Debts 1,800 34,200
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There was a girl who was bald. She was wearing a yellow t-shirt,y. (y. = yellow) bracelet, and y. sandals. She went to her y.
house using her y. car. She took a bath in her y. shower. Afterthat she opened her y. drawer and found a green comb. She
threw it away, why?
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What starts with E, ends with E and has 1 Letter in it?
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Do you think that all of the amount of your debtors will finallyturned out as cash receipts?
DebtorsRM100,000 RM100,000
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Some of the debtors could be uncollectible and become bad.
Thus, to be realistic, the Allowance for Doubtful Debts iscreated.
DebtorsRM100,000 RM100,000DebtorsRM85,000
Bad DebtsRM15,000
RM85,000
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Now, do you think that all remaining RM85,000 will becomecash receipts in the end?
There is another possibility the discount allowed
RM75,000DebtorsRM85,000
Bad DebtsRM15,000
RM85,000DebtorsRM75,000
Discount allowedRM10,000
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Provisions for discount allowed (PFDA) are more or less the sameas PFDD, except, in arriving at this estimation, the amount ofPFDD must be deducted from the Net Debtors (as we dont givediscount to debts that we estimated to be bad).
PFDA = estimate % x (Net debtors PFDD)
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Rolls company had the following balances as at 31 December 2010:Accounts receivable RM40,000Provisions for doubtful debts 2,050Provisions for discount allowed 930Bad debts 1,000
Additional information:1. Bad debts to be written-off is RM6002. Bad debts recovered is RM2003. The following provisions are to be made:
Provisions for doubtful debts 8%Provisions for discount allowed 2%
REQUIREDShow relevant accounts and extract financial statements
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Part 1 Calculate the provisionsNet debtors = debtors bad debts to be written off
+ bad debts recovered to be reinstate
= 40,000 600 + 200 = 39,600
Provisions for doubtful debts
= 8% x 39,600 = 3,168
(increase by 1,118)
Provisions for discount allowed= 2% x (39,600 3,168) = 728.64 729
(decrease by 201)
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Accounts Receivable
Dec 31 Balance b/d 40,000 Dec 31 Bad debts 600Dec 31 Bad debts Rec. 200 Dec 31 Balance c/d 39,600
20102010
40,200 40,200
Bad debts
Dec 31 Acc. Receivable 600
Dec 31 Balance b/d 1,0002010 2010
Dec 31 Income statement 1,600
1,600 1,600
Bad debts recovered
Dec 31 Acc. Receivable 200Dec 31 Income statement 200
2010 2010
200 200
Part 2 Ledger / double entries
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Provisions for Doubtful Debts
Provisions for Discount Allowed
2010 2010
2010 2010
Dec 31 Balance b/d 2,050
Dec 31 Balance b/d 930
Dec 31 Balance c/d 3,168
Dec 31 Balance c/d 729
Dec 31 Income statement 1,118
Dec 31 Income statement 210
3,168 3,168
930 930
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Income Statement (extract) for the year ended 31 December 2010Revenue
Decrease in provision for discount allowed 201
Bad debts recovered 200
Expenses
Increase in provision for doubtful debts 1,118
Bad debts 1,600
Balance Sheet (extract) as at 31 December 2010
Current Assets
Accounts Receivable 39,600Less : Provision for doubtful debts 3,168
Provision for discount allowed 729
35,703
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Prudence concept requires financial reports to consider futurepossible losses and not future gains. This is to avoid assetsor income being overstated and liabilities or losses beingunderstated.
Bad debts are actual losses incurs by businesses as these
debtors are dead or become insolvent. Doubtful debts are estimation made by the businesses to
consider future possible losses (of debtors which becomeuncollectible). Thus assets of debtors will be reduced to avoidfor being overstated.
Provisions for discount allowed is another estimation thatmade by businesses to consider future losses / expenses.
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Bad debts = actual amount of uncollectible debts
Net debtors = debtors bad debts to be written off + bad
debts recovered to be reinstate
PFDD = estimate % x Net debtors
PFDA = estimate % x (Net debtors PFDD)
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Bad debt is an expense Income statement(expenses)
Bad debts recovered is a revenue Incomestatement (revenue)
Increase in PFDD or PFDA Income statement
(expenses) Decrease in PFDD or PFDA Income statement
(revenue)
Net debtors Balance sheet (current assets)
Balance of PFDD and PFDA deduct from
Account Receivables (in Balance Sheet underCurrent Assets)
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We made it!
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Refer to textbook:
Business Accounting Vol. 1
Wood & Sangster
Page 282 - 285