Importance Of Accounting For Bad Debt

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The Bad Debt account is treated as an expense, and is therefore listed among the expense items in section 4 of the Income statement

BAD DEBTS RECOVERED

A debt that was written off as being bad in previous years may eventually become recoverable. This is called a bad debt recovered. Accounting for this involves the following steps:

a) To re-instate the debtor in the firm’s books

Dr Debtor’s Account Cr. Bad Debt Recovered Account

b) To record any amount paid by the debtor

Dr Cash or Bank Account Cr. Debtor’s Account
The Bad Debt Recovered account is treated as a new revenue and is therefore included in section 3 of the income statement

PROVISION FOR BAD
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Provision for Bad Debt Account } last year’s amount

3. To decrease the provision in subsequent years

Dr Provision for Bad Debt Account } With the difference over Cr. Decrease in PFBD } last year’s amount

The Increase in PFBD is an expense ( section 4) while the Decrease in PFBD is a revenue ( section 3). The PFBD is subtracted from the Debtors on the Balance Sheet.

PROVISION FOR DISCOUNTS

After the bad debts have been written off, and a provision has been made for those debts that are doubtful, the firm may then make another provision. This is for any discount that may have been extended to the ‘sure’ debtors.

The provision for discounts is accounting for in the same manner as in the provision for bad debts, i.e., the amount is adjusted in a fluctuating manner at the end of each year, based on various factors. The accounting entries are as follows:

1. To start the provision

Dr Increase in PFD Cr. Provision for Discounts Account

2. To increase the provision in subsequent

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