Provision for doubtful debts account format

The standard format

1. Balance b/d: existing provision
2. Increase in provision: charged as an expense
3. Decrease in provision: added back as income
4. Balance c/d: required provision
5. Full balance deducted from receivables

Filled example

Notes

• Write off known bad debts before calculating the provision.
• Only the change hits the income statement, not the whole provision.
• The full provision reduces trade receivables to a net figure.

Building and reading this format

Not every credit customer will pay. The prudence concept says a business should allow for this in advance. Instead of waiting for a particular debt to go bad, the business estimates the likely loss and records it as a provision for doubtful debts.

The account carries this estimate from one year to the next, raising or lowering it as the estimate changes. Only the movement goes to the income statement, not the whole provision. This is the key point.

The account is a ledger T-account, with debits on the left and credits on the right. The balance carried down is the provision required at the year end. To create or increase the provision, credit the account and debit the income statement as an expense.

To reduce it, debit the account and credit the income statement, which adds back to profit. The closing balance is deducted from trade receivables in the statement of financial position.

Work through the figures. In year one, trade receivables at the year end are RM100,000 and the business sets a provision of 5%, which is RM5,000.

Credit the provision account with RM5,000 and debit the income statement with RM5,000. The whole provision is new this year.

In year two, receivables rise to RM120,000, so 5% gives RM6,000. The account already has RM5,000 brought down, so it needs an increase of only RM1,000. That RM1,000 is the charge to the income statement, not the full RM6,000.

The balance carried down shows the full RM6,000.

In year three, receivables fall to RM80,000, and 5% gives RM4,000. The account carries RM6,000, so the provision falls by RM2,000.

Debit the provision account with RM2,000 and credit the income statement. A reduction adds back to profit.

Look at two things when you read the account: the closing balance and the change from last year. The closing balance links to the statement of financial position, where it reduces receivables to a more realistic figure. The change links to the income statement.

A rising balance means receivables have grown or the estimate is more cautious. A falling balance means the opposite.

Marks are mostly lost by charging the whole provision to profit every year. A student who debits the income statement with RM6,000 in year two, instead of RM1,000, counts an expense twice. Another common slip is putting an increase on the debit side, when an increase is a credit and a decrease is a debit.

Forgetting to bring the balance down, or deducting the provision from the wrong figure in the statement of financial position, also loses marks. Write off known bad debts before calculating the provision.

If you often charge the full provision instead of the change, one of our teachers can work through a three-year example with you until the movement becomes automatic. Book a trial class

Related how-to

• How to record a provision for doubtful debts
• How to write off an irrecoverable debt

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.