Page 192 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes The effect of the above Journal entry is that the balance of sundry debtors account is
reduced to the extent of bad debts and bad debts being a loss are transferred to profit & loss
account of the relevant year.
Recovery of Bad debts written off-Sometimes the debts which are written off as bad, are
recovered fully or a part of it, is recovered, then it is profit which is directly transferred to
profit & loss account and not in the debtors personal account. The entry in such case would
be:
Dr. Cr.
S. No. Particulars L.F. ( ) ( )
Cash A/c Dr.
To Bad debts Recovered A/c
(Profit & Loss A/c)
Bad debts recovered

In case of doubtful debts: On the basis of past experience, if any, a provision is created from
Profit & loss account and is credited to provision for bad and doubtful debts account. The
Journal entry would be:
Dr. Cr.
S. No. Particulars L.F. ( ) ( )
Profit and Loss A/c Dr.
To provision for Bad and doubtful debts A/c
Provision made

The effect of the above journal entry would be reduction of year’s profit and creation of
provision to be shown on the liabilities side of the Balance sheet. But the practice is that the
provision for bad and doubtful debt is deducted from total debtors on the assets side in the
year of creation, but next year when actual bad debts take place, such amount is debited
not from the profit & loss account, but from the provisions for Bad and doubtful debts
account and the balance, if any in this account, is deducted from the total debtors account.
Illustration 14: Mr. Ram Lal closes his books on 31st Dec., 2011 on that date debtors were
50,000. On the basis of past year experience, this has been a practice to provide for bad and
doubtful debts @ 10%.
You are required to journalize the above and prepare the ledger accounts and also show it in the
Balance sheet as on 31st Dec 2011
Solution:
Journal Entry

S. No. Particulars L.F. ( ) ( )
31.12.11 Profit and loss A/c Dr. 5,000
To provision for Bad & Doubtful debts A/c 5,000
Provision for Bad & doubtful debts created @ 10% on
50,000

Ledger Accounts
Provision for Bad and doubtful debts A/c
Date Particulars L.F. ( ) Date Particulars L.F. ( )
31.12.11 To Balance c/d 5,000 31.12.05 By P & L A/c 5,000

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