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Double entry for Bad Debts and Provision for Bad Debts - YouTube
Channel: The Accounting Student
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do you know how to recall bad debts and
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the provision for bad debts in the
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accounts
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I'm Thomas Harwood and welcome to the
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accounting student where we create free
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and short videos so that you can learn
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about accountant today's video is a
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candle entry for bad debts and the
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provision for bad debts just as a quick
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refresh we found out in the prior video
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on what are bad debts that bad debts
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arise when a credit customer does not
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pay their debts additionally some of the
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reasons for a bad day happening could be
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due to a customer going bankrupt the
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business may be a victim of fraud there
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could be a dispute on the goods or
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services or the debt might be too small
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to be worth pursuing in law also in the
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video on what is a provision for bad
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debts we found out that a provision is
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usually calculated by a business to
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estimate the debtors that will turn into
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bad debts the bad debt provision is an
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approximate value which is set against
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the future recognition of debtors as
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being uncollectible and this will
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normally be calculated as a percentage
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of the total debtors amount let's now
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look at how they are both treated in the
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accounts Terry is a car reseller who
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sells a majority of his cars on credit
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recently one of the customers that
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bought a red sports car went bankrupt
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and could not pay her debts of five
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thousand pounds Oh into Terry also due
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to this customer going bankrupt Terry
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wants to account for the debtors who
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might also not be able to pay him in the
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year as well as for future periods he
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currently has seventy five thousand
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pounds in debtors and from previous
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experience six percent of debtors do not
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pay back how will Terry record the
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scenarios in the accounts firstly it was
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briefly mentioned in both the previous
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videos how bad des and its provision is
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treated in the accounts a bad bet is
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recorded in the accounts as an expense
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on the balance sheet and reduces a net
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income whereas a provision is recorded
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in a bad debt
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account and the provision for bad debts
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account for the 5,000 pounds of bad
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debts we would enter the details on the
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debit side of the bad bet expenses T
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account
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let's assumed that the transaction took
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place on the 30th of November 2017 which
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can be shown as 30/11/2011 a details
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column because that is the name of the
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other account that has been affected
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during the transaction and lastly 5000
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is entered in the pound column as this
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is the only bad debt in the period we
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will close off the account and therefore
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both sites needs total to 5,000 pounds
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like so
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however 5,000 pounds is missing on the
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credit side as a result we will post
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5,000 pounds to the profit and loss
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account as this is an expense now for
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the provision of bad debts we should
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work out the provision amount first
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which would be the debtors amount
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multiplied by the historical percentage
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of debtors that do not pay so the
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provision will be 75,000 pounds times by
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6% which equals 4000 of 500 pounds since
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we know that provision amount we will
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enter the details on the credit side of
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the provision for bad debts T accounts
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the transaction took place on the same
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date which can be shown as 30/11/2011
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account effective during the transaction
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and it will be treated as an expense and
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lastly 4500 is entered in the pound
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column so that's was explanation of the
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double entry for bad debts and the
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provision for bad debts if you enjoyed
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accounting student thanks for watching
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we'll see you next time
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