Calculating the provision for doubtful debts
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Calculating the provision for doubtful debts
In year one the business had trade receivables of £10,000. A general provision of 5% is applied. Therefore £10,000 times by 5% equals to £500. As there is no specific provision the general provision will be the total provision. So therefore will be £500. In year two the business has trade receivables of £17,000. The provision for doubtful debts for this year is that 10% will be applied on debts older than six months and 2% on the remaining debts. So the business has £16,000 of trade receivables that are less than six months and £1,000 of trade receivables that are more than six months. So we will work out 10% provision on the £1,000 of debts that are older than six months and this will come to £100. We will then do a 2% provision on the remaining £16,000 which comes to £320. Therefore the total provision for doubtful debts for year two is £100 plus £320 which equals to £420. In year three the business has trade receivables of £22,500. The business has worked out that £300 is a specific provision and that 2% will be applied on the remaining trade receivables. So therefore £300 will be added to the specific provision and then 2% of the remaining which is £22,500 minus £300 times by 2% equals £444. This will then mean that the total provision for year three is £300 plus £444 which equals to £744.
