Module 5: Bad and Doubtful Debts Flashcards
How is a trade debtor recognised?
At its recoverable amount (i.e., the cash the business expects to receive, which is the
amount on the sales invoice).
Why do bad and doubtful debts arise?
Customers may become unable or unwilling to settle their full debts.
They are recognised as a bad debt expense in the profit and loss account.
Bad debts
Debts that cannot (or are highly unlikely to) be recovered e.g. if debtor is insolvent, has gone into liquidation or refuses to pay due to a dispute.
They must be written off and removed from trade debtors.
Doubtful Debts
Debts that may not be recovered.
Doubtful debts are not written off and are not removed from trade debtors. Instead, an allowance for doubtful debt is created.
What is the JE when an entity recognises a bad debt write-off?
Dr P&L – bad and doubtful debts (exp)
Cr Trade debtors (ass)
being write-off of trade debtor.
As the bad debt is removed from trade debtors, the aged debtors ledger will also need to be updated to reflect this.
The bad and doubtful debt expense will cancel the effect of the original sale income in the P&L account.
What is the JE when an entity recognises an allowance for doubtful debt?
Dr P&L – bad and doubtful debts (exp)
Cr Allowance for doubtful debts (decrease in value of asset)
being allowance for doubtful debts
The customer balance will still appear on the aged debtors ledger.
The allowance for doubtful debts is netted off against trade debtors for presentation on the balance sheet and,
therefore, is a credit balance in the nominal ledger.
How does the entity recognise the receipt of cash from a debtor previously written off?
Dr Bank (asset)
Cr P&L – bad and doubtful debts (expense)
being receipt from trade debtor previously written off.How does the entity recognise the receipt of cash from a debtor previously included in the allowance for bad and doubtful debts?
If an entity later receives cash from a debtor previously included within the allowance for doubtful debts, it will not
adjust the allowance. Instead, the allowance will simply be recalculated at the period end.
The journal entry for subsequent measurement must record the increase/ decrease in the allowance for doubtful
debts only. This is because the allowance for bad and doubtful debts is a balance sheet account which is carried
forward each year.
Movement in allowance for bad and doubtful debts and recognition of a write-off - JE
Dr/ Cr P&L – bad and doubtful debts
( expense - increase/ decrease)
Dr/ Cr Allowance for doubtful debts (reduction in asset value - decrease/ increase)
Cr Trade debtors (asset)
being write-off of trade debtors and movement in allowance for doubtful debts
