OTHER ADJUSTMENTS

BAD DEBT
An amount of money (debts) not paid by the customer or money owed to the enterprise and it is not recorded
Once the debt is proven to be uncollectible, the amount of debt is considered as BAD DEBT

BAD DEBT
This is due to certain reasons:
Debtor passed away Debtors becomes bankrupt Debtors have disappeared or cannot be contacted Debtors cannot afford to pay at all or partly

Accounting treatment:
The debtor account should be closed off Bad debts is an expense to the business and should be recorded in the Income

statement.

Journal Entries:
At the time bad debt incurs : Dr. Bad Debt Cr. Account Receivables/Debtors (Being debtors written off as bad debt) At the end of the accounting period: Dr. Income Statement Cr. Bad Debts account (Being bad debt a/c transfer to Income Statement)

ILLUSTRATION 1- BAD DEBT

On 15/12/08, Adam, a debtor for RM500 passed away and the business decided to write off the debt on the same date and year ending 31/12/2008. Answer: Journal entry: 31/12/08 Dr. Bad Debt RM500 Cr. Adam (A/c Rec.) RM500

ILLUSTRATION 1- BAD DEBT

Ledger Entry:
Bad Debt account 31/12/08 Debtor 500 31/12/08 IS 500

500

500

Debtor account (Adam)

31/12/08

Bal. c/d

500

31/12/08

Bad Debt

500

500

500

ILLUSTRATION 1- Bad Debt

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Less: Expenses Bad Debt 500

BAD DEBT RECOVERED

Payment received by the business in respect of the debts after they have

been written off as bad debts in the previous year. Accounting treatment:

Reopen the debtors account Record the amount received from the debtor Bad debt recovered is a revenue to the business and should be recorded in the

Income Statement

Journal Entries:
Create the bad debt recovered account and reopen the debtors account

Dr. Debtor

Cr. Bad Debt Recovered

Record the amount received from debtor

Dr. Cash/Bank Cr. Debtors

Transfer the amount of bad debt recovered to Income Statement

Dr. Bad debt Recovered Cr. Income Statement

Or it can be summarized as:

Dr. Cash/Bank Cr. Bad Debt Recovered Dr. Bad Debt Recovered Cr. Income Statement

ILLUSTRATION 2- BAD DEBT RECOVERED

On 10/03/2008, Badri, a debtor who has disappeared last year, suddenly reappears and settles his debts of RM2,000, which has been written off previously. Answer: Journal entry: 10/03/08 Dr. Cash/Bank RM2000 Cr. Bad Debt Recovered RM2000

ILLUSTRATION 2- BAD DEBT RECOVERED

Ledger Entry:
Bad Debt Recovered account 31/12/08 IS 2000 10/03/08 Cash/Bank 2000

2000

2000

Cash/Bank account

10/03/08

Bad Debt recovered

2000

31/12/08

Bal. c/d

2000

2000

2000

ILLUSTRATION 2- Bad Debt Recovered

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Add: Revenues Bad Debt Recovered 2000

DOUBTFUL DEBT
A possible amount of money that cannot be paid by debtor. A provision is made for such amount so that profit will not be

overstated and losses will not be understated. Accounting treatment:

To provide for the doubtful debt Doubtful debt is an expense to the business and should be recorded in the

Income statement.

Journal Entries:
Create the doubtful debt account

Dr. Doubtful Debt Account Cr. Provision for Doubtful Debt account
Transfer the doubtful debt amount to Income Statement

Dr. Income Statement Cr. Doubtful Debt Account

PROVISION FOR DOUBTFUL DEBT

It is a provision that some of the debts may turn to bad

debt in the foreseeable future. Provision is made based on experience, knowledge on customers and general economic condition. The calculation is made based on the net debtors. Prov. For Doubtful Debt = % of prov. x (debtors-Bad Debt) Accounting treatment: If provision for doubtful debt increases, then the doubtful debt is an expense to the business If provision for doubtful debt decreases, then the doubtful debt is a revenue to the business.

PROVISION FOR DOUBTFUL DEBT Contd

Journal Entries for Increase in Doubtful Debts:
Create or record increase in the Prov. for doubtful Debt (PFDD)

Dr. Doubtful Debts Account Cr. Provision for Doubtful Debts account
Transfer the increase in doubtful debt amount to Income Statement

Dr. Income Statement Cr. Doubtful Debts Account

Journal Entries for Decrease in Doubtful Debts:

Create or record decrease in the Prov. for doubtful Debt (PFDD)

Dr. Prov. for Doubtful Debts Account Cr. Doubtful Debts account
Transfer the decrease in doubtful debt amount to Income Statement

Dr. Doubtful Debts Cr. Income Statement

ILLUSTRATION 3- When PFDD is created for the first time

On 31/12/2007, Razis trial balance shows the following: Debtor RM9,500 During 2007, bad debts to be written off is RM500 and the business decides to create a provision for doubtful Debts of 3 % of the net debtors. Calculation: PFDD(2007) = x % (Debtors Bad Debts) = 3%(RM9,500-RM500) = RM270 Journal entry: 31/12/07 Dr. Doubtful Debts RM270 Cr. Provision For Doubtful Debts RM270

ILLUSTRATION 3- PFDD for first time

Ledger Entry:
Doubtful Debts account 31/12/07 PFDD 270 31/12/07 IS 270

270

270

Provision For Doubtful Debts account

31/12/07

Bal.c/d

270

31/12/07

Doubtful Debts

270

270

270

ILLUSTRATION 3- Contd
Extract Income Statement:

Income Statement for the year ended 31/12/2007(RM) Gross profit XXXX Less: Expenses Bad Debt 500 Doubtful Debts 270 Extract Balance Sheet: Balance Sheet as at 31/12/2007 (RM) Current Asset Debtors 9,000 Less: PFDD 270 Net Debtors 8,730

ILLUSTRATION 4- Increase in PFDD

On 31/12/2008, Razis trial balance shows the following: Debtor RM11,000 Prov. for Doubtful Debt RM 270 During 2008, bad debts to be written off is RM1,000 and the business decides to create a provision for doubtful Debts of 4 % of the net debtors. Calculation: PFDD(2008) = x % (Debtors Bad Debts) = 4%(RM11,000-RM1,000) = RM400 Thus Increase in PFDD : PFDD (2007) = RM270 PFDD (2008) = RM400 Increase by RM130 Journal entry: 31/12/08 Dr. Doubtful Debts RM130 Cr. Provision For Doubtful Debts RM130

ILLUSTRATION 4- Increase in PFDD

Ledger Entry:
Doubtful Debts account 31/12/08 PFDD 130 31/12/08 IS 130

130

130

Provision For Doubtful Debts account

31/12/08

Bal.c/d

400

31/12/08

Bal.b/d
Doubtful Debts

270

130

400

400

ILLUSTRATION 4- Contd
Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Less: Expenses Bad Debt 1000 Increase in PFDD 130 Extract Balance Sheet: Balance Sheet as at 31/12/2008 (RM) Current Asset Debtors 10,000 Less: PFDD 400 Net Debtors 9,600

DISCOUNT ALLOWED & DISCOUNT ALLOWABLE

DISCOUNT ALLOWED:
Cash discount given to customers by a business for early payment.
Journal Entries:
Dr. Discount Allowed Account Cr. Debtors account

DISCOUNT ALLOWABLE:
Discount allowable are potential cash discounts, which may be taken

by debtors who may pay within the discount period allowed to them. Journal Entries:
Dr. Discount Allowewable Account Cr. Provision for Discount Allowable account

PROVISION FOR DISCOUNT ALLOWABLE

An estimate of the discount allowed that might be given to

debtors. The Provision for discount allowable will be revised from time to time due to certain changing conditions such as economic situation. The calculation is made based on the net debtors. Prov. For Discount Allowable = % of prov. x (Net Debtors) Net Debtors = Debtors-Bad Debt Prov. for Doubtful Debts Accounting treatment: If provision for discount allowable increases, then the discount allowable is an expense to the business If provision for discount allowable decreases, then the discount allowable is a revenue to the business.

PROVISION FOR DISCOUNT ALLOWABLE Contd

Journal Entries for Increase in Discount Allowable:
Create or record increase in the Prov. for discount Allowable (PFDA)

Dr. Discount Allowable Account Cr. Provision for Discount Allowable account
Transfer the increase in discount Allowable amount to Income Statement

Dr. Income Statement Cr. Discount Allowable Account

Journal Entries for Decrease in Discount Allowable:

Create or record decrease in the Prov. for discount Allowable (PFDA)

Dr. Prov. for Discount Allowable Account Cr. Discount Allowable account
Transfer the decrease in discount Allowable amount to Income Statement

Dr. Discount Allowable account Cr. Income Statement

PROVISION FOR DISCOUNT ALLOWABLE Contd

Effect to the Income Statement:
Income Statement for the year ended xx.xx.xx (RM) Other Income : Bad Debt Recovered Decrease in PFDD Decrease in PFDA Expenses: Bad Debts Doubtful Debts/Increase in PFDD Discount Allowed Discount Allowable/Increase in PFDA

PROVISION FOR DISCOUNT ALLOWABLE Contd

Effect to The balance Sheet:

Balance Sheet as at xx.xx.xx (RM)

CURRENT ASSETS Debtors Less: Prov. for Doubtful Debts xxx Prov. for Disc. Allowable xxx____ Net Debtors

xxxx

xxx_ xxx ====