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Financial Statements & Provision for Bad Debts Lecture Notes 9 Financial Statements & Provision for Bad Debts

Provision for Bad Debts Definition A provision is any amount: retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which it will arise.

Provision for Bad debt What is it? An account showing the expected amounts of debtors at the balance sheet who might not be able to pay their accounts. Where to find it? Provision for bad debt is usually found in the: Trial Balance Notes to the trial balance

Provision for Bad debt How to treat it? Provision for bad debts found in the trial balance should be deducted from Debtors in Balance Sheet. NOTES to Trial Balance The treatment of provision for bad debts in the financial statements would depend on the instructions of the notes. Create Provision for bad debts $100 Record as an Expense in Profit and Loss A/c $100 Deduct $100 from Debtors in Balance Sheet

Provision for Bad debt NOTES to Trial Balance The treatment of provision for bad debts in the financial statements would depend on the instructions of the notes. Increase Provision for bad debt by $50. This means that there is a provision for bad debt in the trial balance already. E.g. $100 Record an increase in Provision for bad debt as an Expense in Profit and Loss A/c $50 Deduct $150 from Debtors in Balance Sheet

Provision for Bad debt NOTES to Trial Balance The treatment of provision for bad debts in the financial statements would depend on the instructions of the notes. Increase Provision for bad debt to $200. This means that there is a provision for bad debt in the trial balance already. E.g. $100 Record an increase in Provision for bad debt as an Expense in Profit and Loss A/c $100 Deduct $200 from Debtors in Balance Sheet

Provision for Bad debt NOTES to Trial Balance The treatment of provision for bad debts in the financial statements would depend on the instructions of the notes. Decrease Provision for bad debt by $50. This means that there is a provision for bad debt in the trial balance already. E.g. $100 Record a decrease in Provision for bad debt as an income in Profit and Loss A/c $50 Added to Gross Profit in Vertical Format Deduct $50 from Debtors in Balance Sheet

Provision for Bad debt NOTES to Trial Balance The treatment of provision for bad debts in the financial statements would depend on the instructions of the notes. Decrease Provision for bad debt to $100. This means that there is a provision for bad debt in the trial balance already. E.g. $150 Record an decrease in Provision for bad debt as an income in Profit and Loss A/c $50 Added to Gross Profit in Vertical Format Deduct $100 from Debtors in Balance Sheet