The matching principle requires that the cost of bad debts (defaults) need to be anticipated as an expense in the period of the sale. (Since allowing customers credit does increase sales.)
A 'buffer' needs to be created in the period of the sale, that can absorb losses in future periods in case of default. There are two methods to do this.
Percentage of sales methodWith the percentage of sales method a percentage of the sales is book as an expense.
Ageing of accounts methodWith the aging of accounts method, the risk in end of period accounts receivables is estimated. Expenses are booked so that the allowance (buffer) can absorb this amount of losses.
Provison for doubtful debts, under liabiliity, will be created by debiting bad debts account.
Bad debts accounts is a nominal account shown in income statement and use to reduce the accounts receivable amount.
before you do the double entry for the bad debts recovered, you have reinstate the debt by making the following entries:- Dr. debtors account Cr. bad debts recovered account after this you will have to the double entry for this:- Dr.cash or bank Cr. debtors account that's all u have to do!!
No while using allowance method, bad debts are charged to allowance for bad debts account rather charging the accounts receivable because accounts receivable was already charged with allowance when it was created.
before you do the double entry for the bad debts recovered, you have to reinstate the debt by making the following entries:- Dr. debtors account Cr. bad debts recovered account after this, you will have to do the double entry for this:- Dr.cash or bank Cr. debtors account that's all u have to do!!
Bad debt expense account is the actual expense account for bad debts while allowance for doubtful account is the provision for account in case of any bad debts occurs in future.
Provison for doubtful debts, under liabiliity, will be created by debiting bad debts account.
Bad debts accounts is a nominal account shown in income statement and use to reduce the accounts receivable amount.
before you do the double entry for the bad debts recovered, you have reinstate the debt by making the following entries:- Dr. debtors account Cr. bad debts recovered account after this you will have to the double entry for this:- Dr.cash or bank Cr. debtors account that's all u have to do!!
No while using allowance method, bad debts are charged to allowance for bad debts account rather charging the accounts receivable because accounts receivable was already charged with allowance when it was created.
Bad debt is an expense and so reflected in the P&L statement. The allowance for bad debts is a contra-asset account and offsets the amount of the receivable.
before you do the double entry for the bad debts recovered, you have to reinstate the debt by making the following entries:- Dr. debtors account Cr. bad debts recovered account after this, you will have to do the double entry for this:- Dr.cash or bank Cr. debtors account that's all u have to do!!
The provision for bad debts will be categorized under the profit and loss account.
Dr. Bad debt xxx Cr. Assets/Portfolio xxx Below entry wat i underestand is the wrong entry since provision is a liability which is deducted from the loans (assets) it is always a credit balance, it can never appear on the debit (above is the correct entry). Debit Bad Debt Expense Credit Allowance for Bad Debts (a contra-account on the asset side of the balance sheet)
The Allowance for bad debts will go the on the debit side of the Balance Sheet. If total debtors are 20000 and 5% is allowed as allowance for bad debts then 19000 will be shown as debtors and 1000 will be shown as allowance for bad debts in the debit side of the Balance Sheet. When the bad debts actually occur for e.g. if next year bad debts of 500 actually turn out, then the allowance will be reduced by Rs. 500 and the bad debts will be shown in the Dr. Side of Profit and Loss Account.
Debit Bad Debt Expense. Credit Allowance For Doubtful Accounts (a contra-asset account on the Balance Sheet). Before you do the double entry for the bad debts recovered, you have to reinstate the debt by making the following entries:- Dr. debtors account Cr. bad debts recovered account after this, you will...
asset . it is contra to account receivable. and it has -Ve value . -ankur