PAUL A. BORG B.A. (Hons) Econ., Dip. Lab. Stud. Accounting Course
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Unit 12: Bad Debts and Allowance for Doubtful Debts
Preliminary Questions & Coursework
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1. What is meant by a bad debt?
A bad debt occurs when it becomes certain that an account receivable (debtor) is not in
a position to pay his/her debts or part of them. Certainty is usually achieved when the
Court declares that person to be bankrupt.
2. What double entry is made when a debt is seen to be bad?
When a debt is seen to be bad the account of the debtor must be credited (as if he paid)
and the debit entry is made in a ‘Bad Debts’ A/c. This action is known in accounting as
writing off a bad debt. Thus, if J Smith owed us €500 and he is declared bankrupt by the
court on 1/11/2012 and will not be giving us any of the money, the accounts would
appear as follows when the entry for the bad debt is made:
________________________________J Smith A/c_____________________________
1 Jan 2012 Bal. b/d 500 1 Nov 2012 Bad debts 500
_______________________________Bad Debts A/c____________________________
1 Nov 2012 J Smith 500
3. What happens to the total of the bad debts account at the end of the financial year?
At the end of the financial year the total of the bad debts account is transferred to the
Income Statement. Thus, if there are no other bad debts during the year, the Bad Debts
A/c above would appear as follows at the end of the year:
_______________________________Bad Debts A/c____________________________
1 Nov 2012 J Smith 500 31 Dec 2012 Tr. To Inc. St. 500
4. With regard to bad debts and allowances for doubtful debts, which TWO objectives does
the accountant want to achieve when drawing up final accounts?
When drawing up final accounts, TWO objectives that accountants want to achieve are:
to charge as expenses in the Income Statement for that year, an amount
representing sales of that year for which the firm will not be paid;
to show in the Statement of Financial Position as correct a figure as possible of
the true value of accounts receivable at the date of the Statement of Financial
Position.
The first objective fulfils the Accruals concept while the second fulfils the Prudence
concept.
5. What is an Allowance for Doubtful Debts A/c used for?
An Allowance for Doubtful Debts A/c is used only for estimates of the amount of the
debtors at the year-end that are likely to finish up as bad debts.
6. Fill in the blanks in the following statements:
(a) A _____ _______ account is used only when the debt has been proved to be a bad
debt and is written off.
(b) An ______________ _______ _______________ _______ account is used only for
estimates of the amount of the accounts receivable at the year-end that are likely to
finish up as bad debts.
