JOURNAL ENTRY FOR BAD DEBTS AND PROVISION FOR BAD DEBTS


Journal entry for Bad debts & Provision for Bad debts

Hello everyone, here we are going to learn how to pass journal entry for bad debts and provision for bad debts, let us understand the difference between bad debts and provision for bad debts.

BAD DEBTS: - A bad debt is debt that is not collectible and therefore treated as worthless. This usually occurs after all attempts are made to collect but failed. The debtor may going to bankrupt. This is treated as loss in books.
PROVISION FOR BAD DEBTS: - On the basis of previous year bad debts the percentage of bad debts are considered as provision for bad debts and it is a balance sheet item shown as liability. The provision for bad debts is treated as expense in income statement.


Journal Entry for Bad debts: -

Mr.X (debtor) of balance receivable is Rs.10000/- was become bankruptcy because of huge fire accident in his factory.the amount receivable is treated as bad debt . 

Bad debts A/C            Dr      10000
                   To Mr.X A/C                                10000

(Being Bad debt recognized in books)
The rules for passing Journal entry
Debit
The bad debt is a loss for the entity and charge is made to profit and loss account.It is reflected in Profit and loss Account on Debit side as expense.      
As per nominal account rule (Bad debt) “Debit all expense or loss"(Expense Account)
Credit   
The amount receivable from Mr.X is uncertain so the Mr.x A/C is closed by crediting the account.It is reflected in Balance sheet.
As per personal account rule (Mr.X A/C) "Credit the giver account"(Current Liabilities).

Journal Entry for provision for Bad debts: -

provision for bad debt for the year is expected to be 5% of Rs. 1,00,000 

Bad debts A/C            Dr                         5000
                   To Provision for bad debts A/C              5000

(Being Provision for Bad debt recognized in books)
The rules for passing Journal entry
Debit
Provision for bad debts is an expense for the entity and charge is made to profit and loss account.It is reflected in Profit and loss Account on Debit side as expense.As per nominal account rule (Bad debt) “Debit all expense or loss"(Expense Account)
Credit        
The amount receivable from debtor will remain same. But the provision for bad debts on liabilities side reflects the uncertainty of receipt.It is reflected in Balance sheet on Liability side.As per personal account rule (A/C) "Credit the giver account"(Current Liabilities).

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