Page 191 - DMGT104_FINANCIAL_ACCOUNTING

Unit 8: Financial Statements

(ii) For Interest on Investment Receivable Notes
Interest on Investment Account Dr.
To Profit & Loss Account
Interest on Investment Receivable is added to investment in the assets side of the
Balance Sheet and also shown in the credit side of income in Profit & Loss account.
9. For Bad Debts: Bad debts refer to the amount due from debtors which are irrecoverable.
In short, bad debt is a debt which is written off as bad.
Bad Debts Accounts Dr.
To Sundry Debtors Account
Bad Debts are deducted from the sundry debtors in the assets side of the Balance Sheet and
shown in the debit side of Profit & Loss Account.
10. For Provision for Bad and Doubtful Debts: A doubtful debt is an amount due from debtors,
the recovery of which is doubtful. The provision or reserve made out of the current year's
profits for meeting the losses arising out of doubtful debts is known as provision for
doubtful debts. As we know that there are two types of transactions: (1) For cash, and
(2) For credit. In the modern era of science and technology business is not possible without
credit and if it is so then there is always a possibility that out of total sums, some of these
may not recover because of non-payment by the customer and if it happens, which is quite
common in almost every business, only difference is of the degree, so it is very much
necessary to provide for bad debts and this has become a part of policy decisions. The
debts which are bad, immediately entry is passed in the books of the business, but the
debts which are not yet declared as bad (irrecoverable) but the possibility is there that
some of them may be declared as bad, that is why it is necessary to provide for and this is
done by passing an adjustment entry.
(i) When the provision is created:
Profit & Loss Account Dr.
To Provision for Bad and Doubtful Debts Account
Such a provision is subtracted from the debtors in the assets side of Balance Sheet
and also shown in the debt side of Profit & Loss Account.
(ii) When Bad Debts are written off against the Provision for Bad and Doubtful Debts:

Provision for Bad and Doubtful Debts Account Dr.
To Bad Debts Account
(iii) When excess amount of the provision is transferred:
Provision for Bad and Doubtful Debts Account Dr.
To Profit & Loss Account
The debts which are declared bad, immediately an entry for such loss is passed which is as
follows:
Dr. Cr.
S. No. Particulars L.F. ( ) ( )
Bad debts A/c Dr.
(profit and loss A/c)
To sundry Debtors A/c
(debtors to the extent declared as bad)

LOVELY PROFESSIONAL UNIVERSITY 185