OVERVIEW

1. Trade receivables
2. Bad debts
3. Bad debts recovered
4. Allowances for doubtful debts

1. Trade Receivables:

Businesses can sell their products/services on credit or cash terms. Nevertheless, most of the sales
are on credit terms because this can encourage more sales and decrease the risk of dealing with large
amounts of cash. Because of this, there will be customers who owe the business at any one time and
they are called trade receivables or trade debtors. A trade receivable is a current asset as we will
expect the recovery of this debt within 12 months.

TRADE RECEIVABLES ADJUSTMENTS (BAD DEBTS & ALLOWANCE FOR

DOUBTFUL DEBTS)

Adjust Trial
3 balance &
Source Books of Ledgers Financial
Documents Prime Entry Statements

 Memo from the

Management  General
Chapter bad
7 Trade  General
regarding debtsReceivables
Record Post Ledger
LTJ 2018 1
Journal
and allowance for
doubtful amounts
2. Bad debts:

2. Bad debts

A debt that the firm cannot collect from its customer after a long time is known as a bad debt. The
business must have tried all ways to collect it such as telephone call, visit the client’s premise, issue
legal letter etc. If it is confirmed that the debt cannot be collected, the business would have to write
it off as an expense. This will reduce both the trade receivables and profit amount for that year. A
bad debt is a normal business expense. It is important to note that a bad debt is of a known amount
from someone specific. It is not an estimate.

The double entry for bad debt is: Dr Bad debts and Cr Trade receivables.

Illustration 1: Bad debts written off

Mr Trouble was declared a bankrupt on 31 Dec, and his total debt amounted to RM5,000 is to be
written off as a bad debt.

Journal Entry:
Debit Credit
Date Particular RM RM
Dec 31 Dr Bad debts 5,000
Cr Trade receivables 5,000
(Bad debt written off)
Sales Ledger
Trade Receivables: Mr Trouble Account
RM RM
Jan 1 Balance b/d 5,000 Dec31 Bad debts 5,000

General Ledger
Bad Debts Account
RM RM
Dec31 Trade receivables 5,000 Dec31 SPL 5,000
Control

Trade Receivables Control Account

RM
Dec31 Bad debts 5,000

Financial Statement

Statement of Profit or Loss for the year ended 31 Dec … (extract)

RM RM RM
Less: Expenditure
Bad debts 5,000

3. Bad debts recovered

Sometimes, a debt written-off in previous years is recovered in later years. In the year when the
Chapter 7 Trade
bad debt Receivables
was written off, it was an expense that reduced the profit for that year. LTJ 2018 when the
Therefore, 2
debt is recovered later, it should be treated as an income in the year it is recovered. It should be
categorised as other income.

When payment is received from the customer, the following entry shall be made in the books:

Journal Entry:
Debit Credit
Date Particular RM RM
Dr Cash / Bank XX
Cr Bad Debts Recovered (Income) XX
(Bad debt recovered)

(Please note that we do not debit the trade receivables account as this account would have been
closed when the debt was written off previously).

Illustration2: Bad Debts Recovered

On 31 Dec, debts RM8,000 written off in previous years, were recovered.

General Ledger
Bank Account
RM RM
Dec 31 Bad debts recovered 8,000
 Bad Debts Recovered Account
RM RM
Dec Bank 8,000
31

Financial Statement

Statement of Profit or Loss for the year ended 31 Dec … (extract)

RM RM RM
Add: Income
Bad debts recovered 8,000

4. Allowance for doubtful debts:

It is a known fact in business that not all debts can be collected. Businesses can use different
methods and measures to collect their debts but there will be some customers who just won’t pay up,
either because of financial difficulty or bad faith. The percentage (%) of debts that are not collectible
varies from business to business. Based on previous years’ experience, a business can estimate
how much of the debts that cannot be collected. This is called doubtful debts. Unlike bad debts
which are known and specific, doubtful debts are only an estimate, usually stated in terms of % of
total receivables amount. Since the amount is not specific, doubtful debts are categorised as an
allowance (or provision). Thus, we have allowance for doubtful debts. Please note that allowance
for doubtful debts is calculated after deducting bad debts as shown in the example below:

RM
Chapter
Trade 7 Trade Receivables
Receivables (gross) 100,000 LTJ 2018 3
Less: Bad debt (ABC Sdn Bhd) (10,000)
90,000
Less: Allowance for doubtful debts (5%), estimate (4,500)
Trade Receivables (net) 85,500

Similar to bad debts, an allowance for doubtful debt is an expense that reduces both the trade
receivables and profit amounts. We note from the example above that even though we have
customers owing us RM100,000, the net amount of trade receivables, after adjusting for bad debts
and allowance for doubtful debts is only RM85,000. Is it acceptable to you? This is in line with the
Prudence concept which states that assets should not be overstated i.e. even though we have made
RM100,000 sales, we can expect to collect only RM85,500. We should not show the trade
receivables at RM100,000 in our accounts. If we do, we are overstating our asset and may mislead
users into thinking that we have RM100,000 of assets in our books whereas only RM85,500 are
collectible.

Illustration 3: Allowance for Doubtful Debts (AFDD)

(Objective: To estimate the amount owing by certain customers (i.e.: trade receivables) who are
unable to settle their debts)

On 31 Dec 2015, Mr Sad decided at the end of the year to make an allowance for doubtful debts of
5% on the outstanding trade receivables amount of RM250,000. This is the first time that Mr. Sad is
making an allowance for doubtful debts.
 Journal Entry:
Debit Credit
Date Particular RM RM
2015 Dr Doubtful debts (5%x250,000) 12,500
Dec 31 Cr Allowance for doubtful debts 12,500
(Allowance for doubtful debts for the year)

General Ledger

Allowance for Doubtful Debts Account (SFP)

2015 RM 2015 RM
Dec 31 Balance c/d 12,500 Dec 31 Doubtful debts 12,500

Doubtful Debts Account (SPL)

2015 RM 2015 RM
Dec31 AFDD 12,500 Dec 31 SPL 12,500

Trade Receivables Control Account

2015 RM 2015 RM
Dec31 Balance b/d 250,000 Dec31 Balance c/d 250,000

Chapter 7 Trade Receivables LTJ 2018 4

Financial Statements

Statement of Profit or Loss for the year ended 31 Dec 2015… (extract)
RM RM RM
Less: Expenditure
Doubtful debts 12,500

Statement of Financial Position as at 31 Dec 2015… (extract)

RM RM RM
Current Assets
Trade Receivables (after deducting bad debt, if any) 250,000
Less: Allowance for doubtful debts (12,500) 237,500

Quiz
 What is a doubtful debt a/c?
 What is an allowance for doubtful debt a/c??
 Are they the same?

Answer:
 Doubtful debt a/c is an expense account to be charged to SPL.

 Allowance for doubtful debt a/c is an allowance/provision a/c in the

SFP. (to be net off by the trade receivable account). It has a balance
carried forward.

 They are NOT the same!!!!

 Illustration 4: Increase in the Allowance for doubtful debts

On 31 Dec 2016 (the following year), Mr Sad decided to increase the Allowance for doubtful debts
to RM14,000. The opening balance of the Allowance for Doubtful Debts Account (from last year) is
RM12,500. Trade Receivables’ closing balance is RM280,000 as at 31 Dec 2016.

Solution:

*Allowance for Doubtful Debt (AFDD) account always has “Credit” opening balance (i.e. Bal b/d)

General Ledger

Allowance for Doubtful Debts Account

RM RM
2016 2016
Dec 31 Balance c/d 14,000 Jan 1 *Balance b/d 12,500
Dec31 Doubtful debts
(14,000-12,500) 1,500
14,000 14,000
2017
Jan 1 Balance b/d 14,000

Doubtful Debts Account

2016 RM 2016 RM
Dec 31 AFDD 1,500 Dec 31 SPL 1,500

Chapter 7 Trade
Journal Entry:Receivables LTJ 2018 5
Debit Credit
Date Particular RM RM
2016 Dr Doubtful debts 1,500
Dec 31 Cr Allowance for doubtful debts 1,500
(Increase in allowance for
doubtful debts)

Financial Statements

Statement of Profit or Loss for the year ended 31 Dec 2016… (extract)
RM RM RM
Less: Expenditure
Doubtful debts 1,500

Statement of Financial Position as at 31 Dec 2016… (extract)

RM RM RM
Current Assets
Trade Receivables 280,000
Less: Allowance for doubtful debts (14,000) 266,000
Illustration 5: Decrease in the Allowance for doubtful debts

On 31 Dec 2017, Mr Sad decided to reduce Allowance for doubtful debts to RM13,000. The opening
balance of the Allowance for Doubtful Debts Account (from last year) is RM14,000. Trade Receivables’
closing balance on 31 Dec 2017 is RM260,000.

Solution:

General Ledger

Allowance for Doubtful Debts Account

2017 RM 2017 RM
Dec 31 Doubtful debts Jan 1 Balance b/d 14,000
(14,000-13,000) 1,000

Balance c/d 13,000

14,000 14,000
2018
Jan 1 Balance b/d 13,000

Doubtful Debts Account

2017 RM 2017 RM
Dec 31 SPL 1,000 Dec 31 AFDD 1,000

Journal Entry:
Debit Credit
Date Particular RM RM
Chapter
20177 Trade
DrReceivables
Allowance for doubtful debts 1,000 LTJ 2018 6
Dec 31 Cr Doubtful debts 1,000
(Decrease in allowance for doubtful debts)

Financial Statement

Statement of Profit or Loss for the year ended 31 Dec 2017 … (extract)
RM RM RM
Add: Other Income
Decrease in allowance for doubtful debts 1,000

Statement of Financial Position as at 31 Dec 2017… (extract)

RM RM RM
Current Assets
Trade Receivables 260,000
Less: Allowance for doubtful debts (13,000) 247,000
Illustration 6: Detailed Example

The Trial balance of Koko Trading at 31 December 2017 is as follows:

Trial Balance (extract) as at 31 December 2017

Dr (RM) Cr (RM)
Trade Receivable (509,860 – 7,120) 502,740
Bad Debts 7,120
Allowance for doubtful debt @ 1 Jan 2017 23,220
Additional information:
Before the accounts were closed, the owner decided:
1. To write off an amount of RM4,500 owing by Nano because the amount could not be
recovered from him;
2. The allowance for doubtful debts @ 31 Dec 2017 is at 3% of trade receivables.

Required:
Prepare the following as at 31 December 2017:
(a) Journal entries for the above transaction made;
(b) General Ledger :
i) Trade Receivables Control A/c
ii) Bad debts A/c
iii) Allowance for doubtful debts A/c
iv) Doubtful debts A/c
(c) Extract of the Statement of Profit or Loss
(d) Extract of the Statement of Financial Position

Solution:

(a) 7 Trade Receivables

Chapter LTJ 2018 7
Journal Entries:
Debit Credit
Date Particular RM RM
2017 Dr Bad debts 4,500
Dec 31 Cr Trade receivables 4,500
(Mr. Nano’s debt written off)

Dec 31 Dr AFDD 8,273

Cr Doubtful debts 8,273
(Decrease in AFDD from 23,220 -14,947=
8,273)

Note: 3% X (502,740 – 4,500) = RM14,947

(b)
General Ledger

Trade Receivables Control Account

2017 RM 2017 RM
Dec 31 Balance b/d 502,740 Dec 31 Bad debts 4,500
Balance c/d 498,240
502,740 502,740
2018
Jan 1 Balance b/d 498,240
 Bad Debts Account
2017 RM 2017 RM
Dec 31 Balance b/d 7,120 Dec 31 SPL 11,620
Trade 4,500
receivables
11,620 11,620

Doubtful Debts Account

2017 RM 2017 RM
Dec31 SPL 8,273 Dec 31 AFDD 8,273

Allowance for Doubtful Debts Account

2017 RM 2017 RM
Dec 31 Doubtful debts 8,273 Jan 1 Balance b/d 23,220
Balance c/d 14,947
23,220 2018 23,220
Jan 1 Balance b/d 14,947

Financial Statement

Statement of Profit or Loss for the year ended 31 Dec 2017 … (extract)
RM RM RM
Add: Other Income
Decrease in allowance for doubtful debts 8,273
Chapter 7 Trade Receivables LTJ 2018 8
Less: Expenditure
Bad Debts (7,120+4,500) 11,620

Statement of Financial Position as at 31 Dec 2017… (extract)

RM RM RM
Current Assets
Trade Receivables (502,740–4,500) 498,240
Less: Allowance for doubtful debts (14,947) 483,293