Doubtful Debts

What are Doubtful Debts

The doubtful debt are those debts which carry some risk of non payment. However Management is hopeful that there are reasonable chances that customer will pay the debt. Therefore the bad debt are not write off immediately from the books of account instead a provision is created against doubtful debt.

How the Amount of Provision is determined

The provision is normally a percentage of amount receivable because it is technically not possible to perform risk assessment for each individual customer.

The Management determine the appropriate percentage  of provision from the historical data of the entity. The management previous experience of the business and industry practice are also important factor of determining the provision for doubtful debt

Purpose of Provision for Doubtful Debt

1.Prudence Concept

under the prudence concept the income must not be overstated and with the introduction of provision for bad debts is very much compliance of the prudence concept of accounting.

2. Tracking of Doubtful debt

The receivable are still appearing in the books of account and therefore can be effectively chased for recovery.

Accounting Treatment of Doubtful Debt

Unlike actual bad debt the doubtful debts are not immediately write off. However a reasonable provision is created for these bad debts. The accounting treatment can be broadly divided into three stages . creation of provision for the first time , writing off the bad debt against provision in next year and creating a new provision at the end of next year.

Example of Provision for Doubtful Debt

Example of Provision Creation


Company has receivable of amount 20,000 and decided to create a provision of 5%. The required entry would be as under


Income Statement                                        4000 Dr.
Provision for Bad Debts                              4000 Cr

Example of Bad debt against Provision

Company has a provision of 4000 against which a bad debt of amount 3000 is confirmed by credit department. What would be the entry


Provision for Bad Debts            3,000  Dr
Account Receivable                  3,000  Cr

Example of Decrease in provision level

Company has a provision of 10,000 a bad debt confirmed during the year is 2000 . The management decided to maintain a provision for 5000 for next year.


Provision for Bad Debt             2000  Dr
Receivables                               2000 Cr

Provision                                    3000 Dr
Income Statement                      3000 Cr