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Principles of Financial Accounting

1) The document discusses bad debts, provisions for bad debts, and provisions for discounts on bad debts from an accounting perspective. 2) A bad debt is a debt that is unlikely to be paid due to reasons like a debtor not having money or a company going into liquidation. Journal entries are made to record bad debts. 3) A provision for bad debts is a contra asset account used to report the net realizable value of accounts receivable by deducting expected credit losses. Adjusting entries are made to record provisions in the income statement and balance sheet. 3) Similarly, a provision for discounts on bad debts estimates potential discounts that may be given to debtors in

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92 views14 pages

Principles of Financial Accounting

1) The document discusses bad debts, provisions for bad debts, and provisions for discounts on bad debts from an accounting perspective. 2) A bad debt is a debt that is unlikely to be paid due to reasons like a debtor not having money or a company going into liquidation. Journal entries are made to record bad debts. 3) A provision for bad debts is a contra asset account used to report the net realizable value of accounts receivable by deducting expected credit losses. Adjusting entries are made to record provisions in the income statement and balance sheet. 3) Similarly, a provision for discounts on bad debts estimates potential discounts that may be given to debtors in

Uploaded by

Sakshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PRINCIPLES OF FINANCIAL

ACCOUNTING
PROJECT ON BAD DEBTS AND PROVISIONS
SUBMITTED TO :- SUBMIITED BY:-
MISS KAJAL SAKSHI MANGLA
191/17 SEC-D
SEMESTER 1ST
ACKNOWLEDGEMENT

 I would like to express my special thanks of gratitude to my teacher


Miss Kajal Ma’am, who gave me this wonderful opportunity to do this
wonderful project on the topic Bad debts and other Provisions on
Bad debts.
 Secondly I would also like to thank my parents and friends who
helped in finalizing this project within the limited time frame.
INTRODUCTION

Financial Accounting is often called the language of business; it is the


language that managers use to communicate the firm's financial and economic
information to external parties such as shareholders and creditors. Whether
you run your own business, work as a manager or are just starting your
career, you want to understand financial information and be able to interact
with accountants, controllers, and financial managers.
 The role of accounting is to accumulate accounting data in such a manner
that the amount of profit made or loss sustained during a particular period
ascertained. The "final accounts" enable us to check on the conduct of the
business, and to discover whether it is being run profitably. They are the
means of conveying to the owner/owners, management, creditors, and
interested outsiders a concise picture of profitability and financial position of
the business.
 A person who owes money to the firm because of credit sales of goods is
called a Debtor. He is called a debtor because he owes the amount to the
firm, commonly customers of goods/ services are known as debtors.Bad
debts, Provision of bad debts and Provision of discount on bad debts are
the adjustments made while calculating Sundry Debtors of the firm.
BAD DEBTS

 A bad debt is a monetary amount owed to a creditor that is unlikely to be paid and, or


which the creditor is not willing to take action to collect because of various reasons, often
due to the debtor not having the money to pay, for example due to a company going into
liquidation or insolvency.
 Journal entry for bad debts loss :-
Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs.
10000 debt up to end of the financial year. This receivable amount has converted in to bad
debt loss by following entry.

Bad Debts Account Debit 15000

Sham Account Credit 5000

Ram Account Credit 10000


 Journal entry for bad debts written off :-
Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs.
10000 debt up to end of the financial year. This receivable amount has converted
in to bad debt loss and then written off by transferring it in profit and loss
account.
Profit and Loss Account Debit 15000

Bad Debts Account Credit 15000

 Journal entry for bad debts recovered :-


Example : Sham did not pay us our Rs. 5000 debt and Ram did not pay us our Rs.
10000 debt up to end of the financial year 2011. In the financial year 2012, we
received Rs. 6000 from Ram and 2000 from Sham on 7 th june 2012.

Bank Account Debit 8000

Bad Debt Recovered Account Credit 8000


 At the end of the accounting period, when the Trial Balance is drawn, these
two accounts, i.e., Bad Debts and Sundry Debtors appear in the Trial Balance
and both show debit balances.
 The Sundry Debtors appear in the Trial Balance is the net balance after
deduction of Bad Debts, during the year. In such case, Bad Debts are debited
to Profit and Loss Account and Sundry Debtors, as per Trial Balance, appear in
Balance Sheet. But after the preparation of Trial Balance, before the Final
Accounts are drawn, a trader may have addi­tional Bad Debts or further Bad
Debts.These are recorder as :-
Bad debts account Dr.
To Sundry debtors acoount Cr.
Profit and loss account Dr.
To Bad debts account Cr.
 When Bad Debts are given outside Trial Balance:-
Sundry Debtors as per Trial Balance Rs 10,000.
Adjustments: Write off Bad Debts amounting to Rs 300.
PROVISION FOR BAD DEBTS

 The provision for bad debts might refer to the balance sheet account also
known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or
Allowance for Uncollectible Accounts. In this case Provision for Bad Debts is a 
contra asset account (an asset account with a credit balance). It is used along
with the account Accounts Receivable in order to report the net realizable
value of the accounts receivable.
 Provision for Bad Debts might also be an the income statement account also
known as Bad Debt Expense or Uncollectible Account Expense. In this
situation, the Provision for Bad Debts reports the credit losses that pertain to
the period shown on the income statement.
 The adjustment of Provision of doubtful debts in Profit and loss account and
Balance Sheet is shown in the next slide :-
PROVISION FOR DISCOUNT ON BAD DEBTS

 Discount is allowed when our Debtors settle their accounts promptly. If the
Debtors of the cur­rent period settle their accounts promptly in the succeeding
period, discount will have to be allowed by us.
 The amount of discount is an expected loss and a provision has to be made for
it in the Final Accounts of the current year. The Accounting procedure for this
provision is similar to that of Provi­sion for Doubtful Debts discussed above.
So, the discount that might be allowed on debts whose debts fall in the
succeeding year is estimated.
The adjusting entry is :-
Profit and loss account Dr.
To Provision for discount on debtors Cr.
 When discount is allowed, the entry is:
Discount allowed Dr.
To Debtors account Cr.
 At the end of accounting year, the firm also estimates the amount of discount
which it may have to give to the Debtors outstanding at the end of the
accounting period in the course of next year. This is done by creating a
Provision for Discount on Debtors and journal entry is:
Profit and loss account Dr.
To Provision for discount on Debtors Cr.
 The double effect of Provision for Discount on Debtors is:
1. It is shown on the debit side of Profit and Loss Account.
2. It is shown as deduction from Debtors in Balance Sheet. But remember the
amount of Provision is calculated only after deducting the amount of additional
Bad Debts.
CONCLUSION

 Therefore,in this manner the Bad debts and other Provisions are adjusted
while calculating the Sundry debtors of the firm.
 The Profit and loss account and the Balance sheet presents its adjustments.
 These adjustments are necessarily required so that the firm could calculate
its status and its Financial Position in the market.

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