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

Actual Bad Debts

What are Account Receivables

The amount receivable against credit sales are known as account receivables or trade receivables. The receivable carry a great risk of not paying the debt which is technically known as bad debt.

How many Types of Bad Debts

There are basically two types of bad debt i.e actual bad debt and doubtful bad debts. The actual bad debt has little chance of recovery . The doubtful debt however has some chances of recovery.

What are the main reason for bad debt

The main reason for bad debt is financial constraint and liquidity problems facing by the customer.There are number of reason for financial constraint and liquidity problems i.e. customer incurring a heavy loses, fall in demand in the market, general industry recession , general economy recession.

Accounting Treatment of Actual Bad debts

According to prudent concept of accounts the assets are not to be overstated in the books of account. Therefore the debts which are not likely to be recover must not appear as an receivable in the books of accounts and must be written of in the books of accounts.

The bad debt will be charged to income statement as expenses and the receivable amount will be reduced accordingly . In technical term the bad debt will be debited and receivable a/c will be credited.

Example of Bad Debt Journal Entry

The company has a receivable amount of 40,000 out of which a customer owing 3000 is declared bankrupt. what would be the appropriate Journal Entry


Bad Debt                                3000 Dr
Account Receivables             3000 Cr