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Accounting For Doubtful Debts

The document discusses accounting for doubtful debts. An allowance for doubtful debts is created through a credit balance on the balance sheet and corresponding debit to an expense account. Once established, only movements in the allowance need to be recorded each period. The example shows a company writing off a specific doubtful debt through a bad debt expense, and calculating a general allowance based on receivables and past rates, recording only the additional amount needed.

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56 views2 pages

Accounting For Doubtful Debts

The document discusses accounting for doubtful debts. An allowance for doubtful debts is created through a credit balance on the balance sheet and corresponding debit to an expense account. Once established, only movements in the allowance need to be recorded each period. The example shows a company writing off a specific doubtful debt through a bad debt expense, and calculating a general allowance based on receivables and past rates, recording only the additional amount needed.

Uploaded by

ZeeShan Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting for Doubtful Debts

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Accounting for Doubtful Debts

Allowance for doubtful debts is created by forming a credit balance which is


netted off against the total receivables appearing in the balance sheet. A
corresponding debit entry is recorded to account for the expense of the
potential loss. Accounting entry to record the allowance for receivable is as
follows:

Debit Allowance for Doubtful Debts (Expense)


Credit Allowance for Doubtful Debts (Balance Sheet)

Once an allowance for doubtful debts has been created, only the movement in
the allowance will need to be charged to the income statement in future
accounting period. So if estimated allowance for doubtful debt is same as last
accounting period, no accounting entry will be required in the current period
as the total receivables will be reduced by the amount of allowance which has
already been created.

Example
ABC LTD has trade receivable of worth $50,000 as at 31 December 2010.
XYZ LTD, a receivable owing $10,000 to ABC LTD at the year end, has been
recently been wound up. Consequently, ABC LTD does not expect to recover
the amount due from XYZ LTD. Based on past experience, ABC LTD
estimates that 5% of its receivables will default. Allowance for doubtful debts
on 31 December 2009 was $1500.

ABC LTD must write off the $10,000 receivable from XYZ LTD as bad debt.
Accounting entry to record the bad debt will be as follows:

Debit Bad Debt Expense $10,000


Credit XYZ LTD (Receivable) $10,000

A general allowance of $2,000 [( 50,000-10,000) x 5%] must be made. As a


general allowance of $1500 has already been created, only $500 additional
allowance must be charged to the income statement:

Debit Allowance for Doubtful Debts $500


(Expense)
Allowance for Doubtful Debts
Credit $500
(Balance Sheet)

Note that $10,000 in respect of receivable from XYZ LTD has been excluded
from the calculation of the general allowance as it has already been written off
in full.

Bad Debt Expense


Debit $ Credit $
XYZ LTD
10,000 Income Statement 10,000
(Receivable)
10,000 10,000

XYZ LTD Receivable


Debit $ Credit $
Sales 10,000 Bad Debt Expense 10,000
10,000 10,000

Allowance for Doubtful Debts


Debit $ Credit $
Balance c/d 2,000 Balance c/d 1,500
Income Statement 500
2,000 2,000

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