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).
Thanks
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