I have a question regarding the bad & Doubtful Provisions Account..This is a question on my assignment, can anyone help??
Why would after a review, the FD restate the Bad & Doubtful Debt Provision Account to 8% of the debtors from the original 10% .. the debtors account stands at 400,000 on the 31 Dec and the Provision for bad & doubtful debts account stands at 40,000 on the 31 Dec
I have showed the Bad & Doubtful provision account after the implementation, also an extract of the profit & Loss account and the balance sheet (current assets section), but I have to give 2 reasons why this decision was made?? but in the course manual it doesn't give any reasons why??
I am guessing that the question is looking for how you would make the year end adjustment for the change.
The provision is an estimate (either calculated on aged debtors, or judged from experience)
I assume that the 40K was on the books from the C/F provision from previous year and that the 8% is the FDs current estimation of the provision neeeded, therefore you are going to have to adjust for a lower provision.
It's the difference that will affect the P&L and the change the balance on the BS
Hope I understood your question OK and hope my answer hasn't made it more confusing.
shortly you will be inundated by all those who recently took their exams! I can only think of the one reason stated above, that the FD believes that one of the doubtful debts will be paid and has restated accordingly.
Come on everyone, I'm sure someone will give the proper answer!!!
Careful with provisions as they have frequently been used in the past as a means of manipulating profits.
A provision should only be recognised where it is almost certain that the debt will not be repaid.
The finance director must constantly monitor the entities provisioning to ensure that the financial statements give a true and fair view of the entities affairs.
In this instance it would seem that 2% of the debts previously deemed irrecoverable have now either been repaid or have been downgraded from doubtful.
The financial reporting standards to refer to for this are :
Note that the provision is only the difference in provision for this year, not the full provision as that will be being carried around in the P&L from the previous period.
So, if last year there was a provision for 40k and this year there is to be a provision of 32k then the provision in the P&L will be -8k.
hope that this helps,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thankyou and no you haven't made it more confusing.. Yes the 400,000 was a c/f for Dec 31 I have made the adjustments but have to give 2 reasons why? thats where I am confused there is nothing in the course manual explaining why..
Sorry, took too long answering and you have since raised a different point
The provision is made making a reasoned commercial decison either based on past experience on what is normal for that particular trade or on known facts such as a debtor is in administration and therefore is likely not pay (Because it is not confirmed at this stage it can only be a provision).
Or it can be made by analysing the amount of aged debtors that are on the books eg. a debt that is 200 days old is more likely to become a bad debt that one that is only 20 days old. If the amount of older debts has reduced during the year, then the percentage of bad debts is likely to reduce
Bill
-- Edited by Wella on Saturday 6th of March 2010 12:54:38 PM
Thankyou everyone for your help..i'll go and answer the question now!!
I have just done my Level I and Level II sage bookkeeping and waiting for my results, but I am also studying for a diploma in Bookkeping & Accounts, I have passed the beginners and now on the Intermediate, so I may need your help again in the future...
there is nothing in the course manual explaining why..
