So how does this work out so that the appropriate expenses are recorded for each year? Eg.
In first year of trading we set up a specifc allowance of 8000 for doubtful debts.
Dr IDE 8000 Cr Allowance 8000
Then in the next year we keep the allowance the same so no entries needed here. But 6000 of the doubtful debts from last year are written off so the entry would be:
Dr IDE 6000 Cr receivables 6000
What am i missing here because for the 1st year the expense to the IS would be 8000 (which seems right) but for the 2nd year it would be 6000. When really for the 2nd year it should be 8000 too?
It seems that with this method the Income Statement gives the correct expense for the last year but is not trying to give the correct expense for the current year?
The following year the provision has already become integral to the financial statements (in the reserves / capital) so only adjustments to provisions are put through the P&L
If £6k from the first year becomes bad debt but the doubtful debt is to remain at £8k then the £6k transfered from doubtful to bad debt must be replaced through the P&L so £6k taking the doubtful debts affecting the entity back up to £8k.
hope that makes sense. I think that the bit that you missed was that £6k was taken out of doubtful debts into bad debts.
kind regards,
Shaun.
__________________
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 didn't miss anythng. I just assumed that yiou had made a typo when you said you rather than I.
If £6k of the provision becomes bad but the provision is to remain as £8k then the entry for the provision for this year is £6k which is what I said in my first answer.
your confussion is perhaps in keeping the figures the same.
Lets take a differnet example.
year 1. £8k doubtful debt
Year 2. £6k becomes bad debt (and was transferred from doubtful to bad).
The new figure for doubtful debt is to be £5k
To have £5k of doubtful debts you would put £3k through the P&L as doubtful debts to restock back up from the £2k remaining after removing £6k back so that the new doubtful debts figure in the accounts is effectively £5k although only £3k will be shown on the P&L.
The doubtful debts from the previouos year is already in the balance sheet and you adjusted that with the bad debt.
Hope that makes more sense this time.
kind regards,
Shaun.
__________________
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.
That clarifies where i am stuck: I am thinking about the allowance t-account. When a debt is transferred from doubtful to bad how is the allowance t account updated, becasue the only double entry I am aware of that happens is Dr IDE 6k Cr Receivables 6k (for example) ?
So in your example. The t account would still be in Credit 8000 from the first year so for the next year the entry would be Dr Allowance 3k Cr IDE 3k to bring it down to 5k. Is this just another way of saying what you said?
