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Bad debts, provision for bad debts

Ruchi Sharma (PRIVATE JOB) (45 Points)

29 May 2016

Hi, Please explain accounting impact in two subsequent years. I'm majorly confused with provision account. Bad debts will be charged against PNL. How to create provision for two years? Do we not need to deduct Bad debts amount from it? In the first year we will dr PNL with provision amount and in the subsequent year, cr it?

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2 Replies

Giridhar S Karandikar (Team Lead) (7548 Points)
Replied 29 May 2016

while making provision for bad debts you will debit bad debts and credit provision. now subsequently if there's any bad debt that is recoverable from the debtors you will reverse the provision to that amount. but if there's any bad debt that has,proved to be irrecoverable then debit the provision for bad debt and credit the debtor account

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Manish Jain (Chartered Accountant) (119 Points)
Replied 30 May 2016

There can be two alternative ways, both of which lead to same result. The example is based on one of these two ways and is used in majority of the accounting systems.

Consider the following example:

In year 1, one of my debtors has been declared an insolvent and the amount receivable from him i.e. Rs. 100 will no longer be receivable. This Rs. 100 is my bad debts. On the balance sheet date, I estimate that out of my remaining debtors of Rs. 100000, I will not be able to recover 2% i.e. Rs. 2000. So I create a provision for this Rs. 2000.

In year 2, on the very first day itself, this provision of Rs. 2000 will be reversed. Now all the bad debts during the year will be charged to P&L as Bad Debts. Again on the last day, I will make an estimate of the debtors that will not be realised during the subsequent year.