Journal entries for the provision for doubtful debts
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Journal entries for the provision for doubtful debts
First of all we need to look at the debits and credits for the increase or decrease in provision. If there is an increase in the provision the debit will be on income statement as an expense and the corresponding credit entry will be in the provision for doubtful debts. If there is a decrease in the provision then the debit will be for the provision for doubtful debts and the credit entry will be for the income statement as income. So now let's have a look at an example of how this is shown. In year one the provision is created. The business had trade receivables of £10,000, a total provision of £500, and the change in provision is also so an increase in £500 because the provision has been created in this year. The increase of £500 in provision means that this is entered on the credit side of the provision for doubtful debts account. In year two there was a decrease in the provision. The business had trade receivables of £17,000 and a total provision of £420. The change in provision from year 1 to year 2 has gone from £500 to £420 meaning that there's a decrease of £80. So we would carry down the £500 from year 1 into the opening balance of year 2. The change in provision of £80 from the decrease is then entered on the debit side of the provision for doubtful debts account. We then total the T account up for the year and we take the highest balance in the total which is £500 and the remaining balance of £420 is entered on the debit side for the ending balance of year 2. For year 3 there is an increase in the provision. The business had trade receivables of £22,500. There was a total provision of £744 which meant that there was a change or increase in the provision of £324. The carried down balance of £420 from year 2 is bought down into year 3 as £420. The increase in provision of £324 is entered on the credit side of the provision for doubtful debts account. We then total the balances which comes to £744 and will then carry down the remaining amount which is £744 as the ending balance of year 3 and that will be the opening balance for year 4.
