You're right with your thinking. The full amount is taken from the profit and loss account as an expense when the provision is first created. In later years if you increase the provision you would show just the increase as an expense, but if you need to decrease it you show the decrease as a negative expense.
You then show the full amount as being deducted from the debtors figure in the balance sheet. Hope this helps.
Kris
-- Edited by kjmcculloch83 on Tuesday 24th of April 2012 09:46:36 PM
Not sure if I explained that well, heres a worked example:
If you have a debtors figure in year 1 of £1000 and the provision for bad debts is 10% you would show it as an expense in the P&L. You would expense £100 in year one and the provision for bad debts on the balance sheet would sit at £100, shown removed from the total debtors figure.
Then in year 2 if the debtors figure is still £1000 and provision for bad debts remains at 10% the £100 is only shown in the balance sheet.
In year 3 the debotrs figure increases to £2000 and the provision remains at 10%. £100 needs to be added. This is shown as an expense of £100 (just the increase) in the P&L and a provision figure in the balance sheet for £200.
If then in year 4 the debtors figure remains at £2000 but the provision drops to 5% then £100 is shown as a negative expense in the P&L and the balance sheet figure is shown as £100.
As you've correctly identified the figure from the previous period has already been taken through to the balance sheet as part of the retained profit (or loss).
This year as the provision has decreased you simply put through a provision of (346) which adjusts the provision down and again will go forwards to affect the retained earnings figure.
The other side of the balance is an adjustment to the current asset for provision for bad and doubful debts.
Some people think that this should be a liability but it isn't. It is as you've correctly identified in your question an adjustment to an asset.
HTH,
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.
you get two answers in in the time it took me to write one!
Nice answer.
Just one minor thing. As this is a book excercise rather than the real world, on your first post you say about adjusted debtors figure in the balance sheet. Thats a completely legitimate approach but just worth saying I think that I was always taught to show the adjustment seperately for these things as it shows the marker in the exam how you've calculated your figures so even if you get something wrong they can see where, how and why.
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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.
Yes Shaun, I thought I had explained it badly which is why I tried to correct it. While I'm happy to do it, explaining it is not my thing.
Actually did my mock exam for my HNC tonight and an adjustment to bad debt provision is included in it. As I was saying on the ICB forum I've worried so much about the integrated accounts that I left prepayments and accruals off my balance sheet. I feel like Homer Simpson, every time I learn something new it pushes old stuff out.
Sometimes I feel like I'm living in a 64 bit world with an 8 bit brain!
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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.
I usually have a page of working notes so that the marker can see where I got my answers from. Not feeling that great about the exam so I want to get every mark possible!
Another thing I'm confused about is dividends. We were taught to show the interim preference and ordinary dividends as well as the proposed ordinary and preference dividends. Now we've to change it to just the ones that have been paid. Is this right?
The question says "preference dividend of 8% is to be paid in full. A final dividend on ordinary shares of 15 pence per share has been approved." In the trial balance it lists an interim ordinary dividend of £10,000. Which of these goes onto the Profit and Loss and the Balance Sheet? I have included the interim dividend of 10,000... but do I also include the 8% preference dividend?
I have my HNC Accounting exam in 3 weeks and I thought I had everything under control until they threw in bad debts and dividends!
-- Edited by catm82 on Wednesday 25th of April 2012 12:16:26 PM
-- Edited by catm82 on Wednesday 25th of April 2012 12:17:14 PM
The basic principle is that dividends should be recorded only when the company is committed to paying them. The preference share dividends are not optional - the company HAS to pay them, just as they have to pay interest. So you would record them in the current years' accounts.
As Bookann says, you no longer show proposed dividends on final accounts, but they should be shown as a note. At least, thats how we were taught.
Seems we are doing the same exam. Mine is a fortnight tonight. Not really looking forward to it, but hoping for a partnership. Would prefer a sole trader but thats just a dream.
OOp, just realised you have a final ord div as well as the pref shares! The wording is that the ord share div is "approved" (not just that it's proposed) - is that right? Unusual to be able to approve a final dividend before your final accounts are approved, but assuming that's correct, once approved by shareholders the co is pretty much committed to pay the dividend so I would record that one, too. Good luck in the exam. Seems like you'll be fine though!
Thanks for the help guys. Wish I had discovered this forum a long time ago!
Kris, do you know if the exam is made by the SQA or is it the lecturers? I'm studying at Langside College and we've been doing company accounts in preparation so I'm assuming, and hoping, that we'll get a company account in the exam.
Bookann, the question definitely says that the final ordinary dividend has been approved, but I think it is just dodgy wording as we did another one where it said the same thing, I put it in the appropriation account only to be told to take it out again and put it down as a note... but wasn't really sure about why! I will ask.
It's the SQA who set it. We've been told to expect a ltd company or a partnership. I'm still struggling with appropriating the production overheads. I do it because I know I have to, I'm still not really sure why.
