TOPIC 6:

ACCOUNTING FOR ASSET- DEBTORS

1. Current Asset : Debtors

DefinitionA debtor is a person who has an obligation to

pay debt to a business resulting from the activities of buying stocks

• 2 types of debtors: i. Trade Debtors- debtors from sales of stock

ii. Debtors – from sales of assets.

Receivables

Accounts receivable are amounts owed by customers on account.

Notes receivable are claims for which formal instruments of credit are issued evidencing the debt.

Other receivables include non-trade receivables such as interest receivable, loans, advances and GST receivable.

Credit Control:i. Credit approval - approve the credit only

to the appropriate customerii. Recording – record a complete credit

amount in the individual debtors account,

before posting to debtors control account

and make a frequent checking.iii.Credit policy – the credit policy must be determined before hand in the credit

policy to the debtors.

1. Current Asset : Debtors

5001,0001,5003,0004000Abu

1,5002,5004,0006000Ahmed

1,0001,0001,0003,0005,000Ali

>60

days

60

days

30

days

Current

Period

Total

Debt

Credit

Limit

Debtors

How to measure the collection of debtors account?This can be done using the ageing report.

Refer to the ageing schedule, most probably Abu cannot settle his debt.

1. Current Asset : Debtors

Accounting for Bad Debt Expense

Allowance method

Direct write-off method.

Methods of Estimating Doubtful Debts when using the Allowance method

Percentage of sales – Estimated for expense is based on some measure of sales

Percentage of Receivables – Estimate for expense is based on ending accounts debtor and the existing balance in the allowance account.

Allowance for Doubtful Debt:What is the difference between the bad

debt and allowance for doubtful debt?- Bad debt is a debt that cannot be

collected within the accounting period.- Allowance for doubtful debt is an expected debt that cannot be collected within accounting period.

Comply with the concept of:i. Matchingii. Prudence

The journal entry to record bad debts expenses:

Allowance for Doubtful Debts Cr

Bad Debt ExpensesDr

Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses:

Example 1: (No Allowance on doubtful debts account:)

The information below is about Ainun Enterprise for the year ended 31/12/07.

Debtor (before bad debt written off) RM 80,000

Bad Debts written off RM 2,200

Journal Entry:

Debtors’ a/c Bad debts expensesBad debts exp. 2,200Bal b/d 80,000

80,000

80,000

Bal. c/d 77,800

2200 Bad Debt Expenses

(posting to Income Statement)

2200Income Statement

CrDr

(being a bad debt written off)

2,200 Debtors

2,200Bad Debt Expenses

Inc. Statement . 2,200

Debtors 2,200

2,200

2,200

Presentation in Income Statement:

Income Statement for the year ended …

Presentation in Balance Sheet:

Balance Sheet as at ….

2,200Bad debts

Operation Expenses :

77,800 ( 0) (-) Allow for d/d

77,800Debtors

Current Asset

Using the Allowance for BD & DD to write-off Bad Debts Expenses:

Example 2: (No bad debts written off and Allowance for BD & doubtful debts is created):

The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000Ainun expected that uncollectible debt is 3% from the debtors balance.

Workings:Allowance for Bad Debt & Doubtful debt on 31/12/2007

80,000 x 3% = RM 2,400

Journal Entry:

Allowance for BD & DD a/c

Bad debts expenses a/c

CrDr

(being an allowance for d/d for the year)

2,400 Allowance for BD & DD

2,400Bad Debt Expenses

Bad debts exp. 2,400Bal c/d 2,400

IS 2,400All d/d 2,400

2,400 2,400

Presentation in Income Statement:

Income Statement

Presentation in Balance Sheet:

Balance Sheet as at….

2,400Bad debts

Operation Expenses :

77,600 ( 2,400) (-) Allow. for d/d

80,000Debtors

Current Asset

Using the Allowance for BD & DD to write-off Bad Debts Expenses:

Example 3: (Decrease in Allowance for BD & DD):

The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000Bad debts written off RM 2,200Allowance For doubtful debt (1/1/07) RM 2,500

Ainun expected that un-collectible debts is 2% from the debtors balance

Workings:Provision for doubtful debt on 31/12/2007

(80,000 – 2,200) x 2% = RM 1,556

Journal Entry:

1,256 Allowance for BD & DD

1,256Bad debts expenses

(being a bad debt written off)

CrDr

(being a decrease in allowance for doubtful debt)

2,200 Debtors

2,200Allowance for BD & DD

Allowance for BD & DD a/c

Bad debts expenses a/c

Debtor a/c

Bad debts expenses 1,256Balance c/d 1,556

Balance b/d 2,500Debtors 2,200

3,756 3,756

Income Stat. All. For BD

DD 1,256 1,256

All for BD &DD 2,200Bal b/d 80,000

80,000

80,000

Bal. c/d 77,800

Presentation in Income Statement:

Income Statement

Presentation in Balance Sheet:

Balance sheet as at

1,256Bad debts

Operation Expenses :

76,244 ( 1,556) (-) All for BD & DD

77,800Debtors

Current Asset

Using the Allowance for Doubtful Debt to write-off Bad Debts Expenses:

Example 4: (Increase in Allowance for BD & DD):The information below is about Ainun Enterprise for

the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000Bad debts written off RM 2,200Allowance for BD & DD (1/1/07) RM 2,000

Ainun expected that uncollectible debts is 5% from the debtors balance

Workings:Allowance for BD & DD on 31/12/2007

(80,000 – 2,200) x 5% = RM 3,890

Journal Entry:

2,000Allowance for doubtful debt

3,890 Allowance for doubtful debt

3,890Bad debts expenses

(being a bad debts written off)

CrDr

(Being an increased in the Allowance for BD & DD a/c)

2,200 Debtors

200Bad Debt Expenses

Allowance for BD & DD a/c

Bad debts expenses a/c

Debtors’ a/c

Bad debts expenses 3,890Balance c/d 3,890

Balance b/d 2,000Debtors 2,000

5,890 5,890

All for BD & DD 3,890

Income Stat. 4,090Debtors 200

4,090 4,090

Bal. c/d 77,800

All for BD & DD 2,000Bal b/d 80,000

80,000

80,000

Bad debts exp. 200

Presentation in Income Statement:

Income Statement

Presentation in Balance Sheet:

Balance sheet as at

4,090Bad debts

Operation Expenses :

73,910 ( 3,890) (-) All for BD & DD

77,800Debtors

Current Asset

Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses:

Example 5: (Bad debt over Provision):

The information below is about Ainun Enterprise for the year ended 31/12/07. Debtor (before bad debt written off) RM 80,000Bad debts written off RM 800Allowance For BD & DD (1/1/07) RM 1,650

Ainun expected that un-collectible debts is 1% from the debtors balance

Workings:Allowance for BD & DD on 31/12/2007

(80,000 – 800) x 1% = RM 792

Journal Entry:

800Allowance for BD & DD

58 Bad debts over provision

58Allowance for BD & DD

(being a bad debts written off)

CrDr

(Being a bad debt over provision)

800 Debtors

Allowance for BD & DD a/c

Bad debts over provision a/c

Debtors’ a/c

Bad debt over prov. 58

Balance c/d 792

Balance b/d 1,650Debtors 800

1,650

1,650

All for BD & DD 58 Income Stat. 58

Bal. c/d 79,200All for BD & DD 800Bal b/d 80,000

80,000

80,000

Presentation in Income Statement:

Income Statement

Presentation in Balance Sheet:

Balance sheet as at….

58Bad debts over provision

Other Income:

78,408 ( 792) (-) Allowance for BD & DD

79,200Debtors

Current Asset

Bad Debt Recovered

debt that are considered bad are paid back by customer (debtors) for the full amount or half of the amount

Example :

On 15/6/2007, one of the customers names

Ali had paid back his debt for an amount of RM2,000

(being a cash received for customers bad debt)

2,000 Ali a/c

2,000Bank

2,000Ali a/c

2,000 Bad debts recoverable

OR

2,000

Bank

(being a bad debts recoverable)

CrDr

(Being a bad debt recoverable)

2,000 Bad debt recoverable

• Journal Entry: