Do you know how to record bad debts and the
provision for bad debts in the accounts? I’m Thomas Harwood and Welcome to The Accounting
Student, where we create free and short videos so that you can learn about accounting. Today’s video is looking at the double entry
for bad debts and the provision for bad debts. Just as a quick refresh we found out in the
prior video on “What are Bad debts?” that bad debts arise when a credit customer does
not pay their debts. Additionally, some of the reasons for a bad
debt happening could be due to a customer going bankrupt, the business maybe a victim
of fraud, there could be a dispute on the goods or services. Or the debt might be too
small to be worth pursuing in law. Also in the video on “What is the provision
for Bad Debts?” we found out that a provision is usually calculated by a business to estimate
the debtors that will turn into bad debts. The bad debt provision is an approximate value
which is set against the future recognition of debtors as being uncollectible and this
will normally be calculated as a percentage of the total debtor’s amount. Let’s now look at how they are both treated
in the accounts. Terry is a car reseller, who sells the majority
of his cars on credit. Recently one of the customers that bought a red sports car went
bankrupt and could not pay her debts of £5,000 owing to Terry. Also, due to this customer going bankrupt,
Terry wants to account for the debtors who might also not be able to pay him in the year
as well as for future periods. He currently has £75,000 in debtors and from previous
experience 6% of debtors do not pay back. How will Terry record the scenarios in the
accounts? Firstly, it was briefly mentioned in both
the previous videos how bad debts and its provision is treated in the accounts. A bad debt is recorded in the accounts as
an expense on the balance sheet and reduces the net income. Whereas the provision is recorded
in the bad debt expense account and the provision for bad debts account. For the £5,000 of bad debts. We would enter
the details on debit side of the Bad Debt expense T account. Let’s assume the transaction
took place on the 30th November 2017, which can be shown as 30/11/2017. Then we will note
it as the customers name, for this example S.Jones, in the details
column because that is the name of the other account that has been affected during the
transaction. And lastly 5,000 is entered in the £ column. As this is the only bad debt in the period
we will close off the account and therefore both sides need to total to £5,000 like so.
However, £5,000 is missing on the credit side, as a result we will post the £5,000
to the profit and loss account as this is an expense. Now for the provision for bad debts. We should
work out the provision amount first which will be the debtors amount multiplied by the
historical percentage of debtors that do not pay. So the provision will be £75,000 x 6%
=£4,500. Since we know the provision amount we will
enter the details on credit side of the provision for bad debts T account. The transaction took
place on the same date, which can be shown as 30/11/2017. Then we will note the detail
as Profit and Loss because that is the name of the other account affected during the transaction
and it will be treated as an expense. And lastly 4,500 is entered in the £ column. So that was the explanation of the double
entry for bad debts and the provision for bad debts. If you enjoyed it, press the like
button. If you have a question you want answered leave
it in the comments below and we’ll try our best to answer it. And if you’re not already subscribed make
sure you click the red subscribe button to keep updated with The Accounting Student. Thanks for watching we’ll see you next time.