There are some items in the balance sheet whose recovery is doubtful although those are not completely irrecoverable. It is not wise to completely ignore them or take them as completely irrecoverable. That is why a â€œprovisionâ€ of such debts is made. These types of debts are knows are doubtful debts. These are also known as Allowance of Uncollectible debt, Allowance for doubtful account or allowance of doubtful debts.
On the other hand Band debt is such amounts that are unlikely to be paid or the creditors are not putting much effort to collect them. There can be many reasons for the formation of bad debt such as insolvency of the firm or liquidation. That is why it is important to maintain a provision from beforehand so that the firm is not badly affected by such action. It is a safety measure of the firm for such unforeseen acts.Â There are different definitions of bad debts according to the accounting conventions that are followed. The provision of bad debt arises when a loan appears to be a â€œproblem loanâ€.
Thus this amount needs to be either written off against the profit and loss account or a provision needs to be maintained. These are certain points that need to keep in mind while doing the Provision for bad and doubtful debt given in the Trial balance homework answer.
Â Other types of provisions
The provisions for doubtful debts can be broadly classified into two types, namely the specific types of allowances and the general allowance
Provision for bad and doubtful debts given in the Trial balance homework answer can be treated as a specific allowance. These allowances are done against some specific assets which are receivable but in the current accounting period facing some serious financial dispute. Such long outstanding balances can be considered under the provision for doubtful debts.Â There is a difference in which these types of specific allowance are treated and the way the bad debts are treated. In the latter case, as soon as the amount of bad debts is received the ledger of bad debts is reduced to nil. On the other hand, as soon as the specific allowance is received the ledger is not completely written off. Another major difference between the two is that, the specific allowance may not for made for the entire amount. Whereas the bad debts is created for the full amount.
The general allowances are created by scrutinizing the history of the recoverability of the bad debts. But according to the IAS 39, the creation of general allowances from the past experiences or past records are prohibited. Rather it is expected that the accountant entity should carry out an impairment review before the Â f
Accounting method of provision for doubtful debts and bad debts
Provision for bad and doubtful debts given in the trial balance homework answer can be completed by the following way. The provision for doubtful debts is created by writing off the amount from the total amount that has to be received appearing in the balance sheet. At the same time a corresponding entry has to be made on the debit side. These show the potential loss. The above event can be shown through the following journal entry.
Provision for doubtful debts (expenses) ————————– (debit)
Provision for doubtful debts (balance sheet) ——————– (credit)
If the amount of the provision is same in the current period as the previous year then no entry has to be made.
Similarly, the accounting entry for the bad debts can be written as
Bad debt expenses â€¦â€¦â€¦..Â (Debited)
To (The companyâ€™s name) ABC (let)â€¦â€¦â€¦â€¦. (Credited)
This is how the provision for bad and doubtful debts given in the trial balance homework answer is recorded.
How to improve in the accounting of bad and doubtful debts?
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