Worked examples
Provision for doubtful debts: worked examples
Two worked examples on creating and adjusting a provision for doubtful debts, charging only the change to the income statement. All figures are our own.
Example 1
Trade receivables are RM20,000 after writing off a RM1,000 bad debt. A provision of 4% is required and there is no existing provision. Show the amount charged.
| Irrecoverable debt written off | RM 1,000 |
| Provision for doubtful debts (4% × 20,000) | RM 800 |
| Total charge | RM 1,800 |
Try it yourself: what net receivables appear in the statement of financial position? (20,000 − 800 = RM19,200.)
Example 2
Receivables are RM25,000. The provision needed is 4%, and last year's provision was RM800. Show the charge or credit this year.
| Balance b/d (last year) | |
| Increase charged this year | RM 200 |
| Balance c/d (4% × 25,000) | RM 1,000 |
Try it yourself: if receivables fell so the provision needed were RM600, what happens? (A 200 decrease is added back as income.)
Method and where the marks are
Marks in this topic are lost to the order of the steps far more often than to the arithmetic. First settle how much trade receivables you are working with. If a debt is known to be irrecoverable, write it off as a bad debt before you calculate any provision.
The provision is a percentage of the receivables that remain. A written-off debt left in the figure inflates everything after it. So take the trade receivables balance, remove any specific bad debt written off, then apply the percentage.
The reasoning combines prudence and matching. Some customers who owe money at the year end will not pay, though you cannot yet name them. Prudence says not to overstate an asset you may not fully collect.
Matching says the likely loss belongs in the same period as the sales that created the debts. A provision is an estimate, not a fact, which is why it is a percentage of the remaining receivables and not a list of customers.
If remaining receivables are RM40,000 and the policy is 5%, the required provision is RM2,000. That is the target balance on the provision account.
The idea examined most is that, after the first year, you charge only the change to the income statement. Work out the required closing provision. Compare it with the provision brought forward.
The difference goes to the income statement. An increase is an expense. A decrease is added back as income.
Charging the full RM2,000 every year double counts amounts already provided for. Set out a short working: required provision, less provision brought forward, equals increase or decrease. A method mark often sits there.
Presentation follows a fixed pattern. In the income statement, bad debts written off and any increase in the provision are both expenses. In the statement of financial position, show trade receivables at the full figure, with the provision deducted just below.
Receivables of RM40,000 less a provision of RM2,000 give net receivables of RM38,000. Show both lines. The examiner wants to see them.
If a debt is recovered after being written off, the recovery is income. It is not a reduction of the provision.
Keep three events apart. A bad debt written off is a definite loss on a named account, and it is removed from receivables. A provision is an estimate against the receivables that remain, and it never touches a named account.
A bad debt recovered is money coming back after a write-off, and it is income for the year. Mixing these up gives a chain of wrong figures. Applying the percentage before removing the bad debt overstates the provision.
Label your working clearly. A correct working can earn the method mark even if the final number is wrong. Watch the direction of the change.
An increase in the provision reduces profit and a decrease increases profit. If a question gives separate specific and general provisions, deal with the specific provision first and apply the general percentage to what is left.
If you often charge the whole 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
These are our own worked solutions and commentary, not the board's mark scheme. For official papers, see the exam boards page.
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