ACCOUNTING FOR RECEIVABLES

By MSMA OCT2012

LEARNING OBJECTIVES
Identify and distinguish the different types of receivables.
Explain the terms bad debt, doubtful debt, bad debt

recovered and allowance for doubtful debts. Describe the accounting entries to record bad debt, bad debt recovered and allowance for doubtful debts.

Adjustment on Debtors
Bad debt expenses

Provision for discount allowable (PFDA)

Presentation in the Profit and Loss account

Bad debt recovered

Discount allowable

Presentation in the Balance Sheet

Doubtful debt expenses

Provision for doubtful debts (PFDD)

Bad debt expenses

Definition: Amounts of debts, which are considered uncollectable

after all efforts have been made to collect them. Possible scenarios/reasons that may exist concerning a bad debt:
1. 2. 3. 4.

Dishonesty Financial difficulty Passed away Could not be traced

The debtors account may be bad totally or partly bad

Journal entry:

DR : Bad debt expenses CR : Debtor

Bad debt recovered

later years. It is considered as revenue to the business & credited tot the income statement. Journal Entry: Journal Entry: alternative 1 alternative 2 DR : Debtor DR : Cash/Bank CR : Bad debt recovered CR : Bad debt recovered DR : Cash/Bank
Definition: a debt written off in previous years to be recovered in

CR : Debtor

The reason for reinstating the debt in the ledger account of the debtor is to have detailed history of his/her account as a guide for granting credit in the future

Doubtful debt expenses

Definition: the amounts of debts that will probably not be

collected Journal entry: DR Doubtful Debt expenses Cr Provision for Doubtful Debts (PFDD)

Provision for doubtful debts (PFDD)

Definition: An account showing the expected amounts of debtors at

the balance sheet date who will not be able to pay their accounts. Journal entry: DR Doubtful Debt expenses Cr Provision for Doubtful Debts (PFDD) Calculation:
Debtors (after deducting bad debt written off) x % of provisions

(please remember that the amount calculated is the amount of balance c/d in the PFDD a/c for that accounting period)

EXAMPLE
A business starts on 1st January 2006 and its financial year

end is 31st December annually. The following table contain an information regarding the debtors of the company:
Year ended 31st December Debtors at the end of year Bad debt Provision for written off doubtful debt during the year Provision for discount allowable

RM 2006
2007 2008 2009

RM 423
510 604 610

% 2
3 2 3

% 3
4 3 4

6000
7000 7750 6500

Requirement:
Prepare the Bad Debt a/c and PFDD a/c 2. Show all relevant calculation
1.

Solution
2006 Dec 31st Bad debt a/c 2006 Debtors 423 Dec 31st Profit & loss a/c 423

2007 Dec 31st Debtors 510

2008 Dec 31st 2009 Dec 31st

2007 Dec 31st Profit & loss a/c 510

2008 Dec 31st Profit & loss a/c 604 2009 Dec 31st Profit & loss a/c 610

Debtors 604

Debtors 610

Solution
Provision for Doubtful Debt a/c 2006 2006 Dec 31st Bal c/d 112 Dec 31st Doubtful Debt exp a/c 112

2007 Dec 31st Bal c/d

195

2007 Dec 31st Bal b/d Doubtful debt exp a/c

112 83

2008 2008 Dec 31st Reduced in PFDD 52 Dec 31st Bal b/d 195 Bal c/d 143 2009 2009 Dec 31st Bal c/d 177 Dec 31st Bal b/d 143 Doubtful debt exp a/c 34 (increase in PFDD)

Discount allowable
Definition: : the portion of amount owed to us that will

probably be discounted due to early payment (cash discount) made by debtor. Journal Entry: DR Discount allowable CR Provision For Discount Allowable (PFDA)

Provision for discount allowable (PFDA)

Definition: An account showing the expected amounts of discount at the

balance sheet date that may be given to the debtors. Journal Entry: DR Discount allowable CR Provision For Discount Allowable (PFDA) Calculation:

( Debtors (after deducting bad debt written off) PFDD ) x % of discount

(please remember that the amount calculated is the amount of balance c/d in the PFDA a/c for that accounting period)

Requirement:
Prepare the PFDA a/c 2. Show all relevant calculation
1.

Solution
Provision for Discount Allowable a/c 2006 2006 Dec 31st Bal c/d 164 Dec 31st Disc. allowable exp a/c 164

2007 Dec 31st Bal c/d

2007 252 Dec 31st Bal b/d 164 Disc.allowable exp a/c 88 2008 2008 Dec 31st reduced in PFDA 42 Dec 31st Bal b/d 252 Bal c/d 210 2009 2009 Dec 31st Bal c/d 229 Dec 31st Bal b/d 210 Disc.allowable exp a/c 19 (increase in PFDA)

Presentation in the Profit and Loss account

Company names Trading, profit and loss account for the year ended 31st December 20XX (EXTRACT) Revenue: Bad debt recovered Reduced in PFDD Reduced in PFDA Expenses: Bad debt expenses Doubtful debt expenses (Increase in PFDD) Discount Allowable (Increase in PFDA)

xx xx xx

(xx) (xx) (xx)

Presentation in the Balance Sheet

Company Name Balance Sheet as at 31st December 20XX (EXTRACT)

Current Asset Debtors Less: PFDD Less: PFDA Net Debtors

xxx (xx) (xx) xxx

Requirement:
1.

Prepare the Profit and Loss a/c (extract) and Balance Sheet (extract) for each of the year end

Solution
Company names Trading, profit and loss account for the year ended 31st December. (EXTRACT) Revenue: Bad debt recovered Reduced in PFDD Reduced in PFDA Expenses: Bad debt expenses Doubtful debt expenses (Increase in PFDD) Discount Allowable (Increase in PFDA) 2006 2007 2008 2009 52 42 -

423 510 112 83 164 88

604 610 34 19

Solution
Company Name Balance Sheet as at 31st December 20XX (EXTRACT)

Current Asset Debtors Less: Bad debt Less: PFDD Less: PFDA Net Debtors

2006 2007 2008 2009 6000 7000 7750 6500 (423) (510) (604) (610) (112) (195) (143) (177) (164) (252) (210) (229) 5301 6043 6793 5484

TUTORIAL 1

TUTORIAL 1
SOLUTION FOR THIS QUESTION
STEP 1: FIND THE YEAR ENDED STEP 2: FIND THE NET DEBTOR = DEBTOR- BAD DEBT

STEP 3: MAKE A TABLE FOR FINDING BALANCE C/D OR BALANCE B/D FOR PFDD / PFDA

YEAR 2008 2009

ACC REC

BAD DEBT

BAL C/D (NET DEBTOR)

PFDD (BAL C/D %)

PFDD (BAL B/D)

STEP 4: CONSTRUCT ACCOUNT TO MAKE COMPARE STEP 5: CONSTRUCT BALANCE SHEET

SOLUTION 1(i): MAKE A TABLE & CATEGORIZE FOR FIND PROVISION FOR DOUBTFUL DEBT

YEAR 2008 2009

ACC REC

BAD DEBT 1680 450 = =

BAL C/D (NET DEBTOR)

95000 56000

PFDD (BAL C/D %)

5700 (6%) 2240 (4%)

PFDD (BAL B/D)

3220 5700

96680 ( - )
56450 ( - )

FORMULA FOR ALLOWANCE FOR DOUBTFUL DEBT(AFDD) AFDD= % X (TOTAL ACCOUNT RECEIVABLE- BAD DEBT)

Formula AFDD 2008:

Formula AFDD 2009:

6% x RM 95000
= RM 5700

4% x RM 56000
= RM 2240

SOLUTION 2(i):

RECORD INTO JOURNAL ENTRIES

PROVISION FOR DOUBTFUL DEBT

30/6/08 Balance c/d

RM 5700

01/7/07 Balance b/d Doubtful Debt

RM 3220
RM 2480 RM 5700

RM 5700 30/6/09 Balance c/d Doubtful Debt RM 2240 RM 3460 RM 5700 01/7/08 Balance b/d

RM 5700

RM 5700

SOLUTION 1(ii): MAKE A TABLE & CATEGORIZE FOR FIND DISCOUNT ALLOWABLE
FORMULA FOR ALLOWANCE FOR DISCOUNT ALLOWABLE(PFDA) PFDA= % X (TOTAL ACCOUNT RECEIVABLE- PFDD)

YEAR 2008 2009

BAL C/D (NET DEBTOR) 95000

56000 (-) (-)

PFDD (BAL C/D %) 5700 2240 = =

PFDA (BAL C/D %) 2679 (3%) 1075 (2%)

PFDD (BAL B/D)

1850 2679

Formula AFDA 2008:

Formula AFDA 2009:

3% x RM 89300
= RM 2679

2% x RM 53760
= RM 1075

SOLUTION 2(ii):

RECORD INTO JOURNAL ENTRIES

PROVISION FOR DISCOUNT ALLOWABLE

30/6/08 Balance c/d

RM 2679

01/7/07 Balance b/d Discount Allowable

RM 1850
RM 829 RM 2679

RM 2679 30/6/09 Balance c/d Discount Allowable RM 1075 RM 1604 RM 2679 01/7/08 Balance b/d

RM 2679

RM 2679

SOLUTION 3( FINAL STEP ACCORDING QUESTION): EXTRACTING THE FIGURE THROUGH BALANCE SHEET

SUKA HATI ENTERPRISE

Balance Sheet as at 30 Jun 2008 and 2009(Extract) Current Asset Account Receivable Less: P.F.D.D Less: P.F.D.A 2008 95000 5700 2679 86621 2009 56000 2240 1075 52685

TUTORIAL 2

TUTORIAL 2

SOLUTION 1:
YEAR 1/1/0731/12/07 1/1/0831/12/08 ACC REC

MAKE A TABLE & CATEGORIZE

BAD DEBT BAL C/D (NET DEBTOR) PFDD (BAL C/D) PFDD (BAL B/D)

4,000,000 4,500,000 4,800,000

(-) (-) (-)

5,500 1,300 2,500

= = =

3,994,500 4,498,700 3,597,500

51,000 42,000 49,000 51,000 42,000

1/1/0931/12/08

FORMULA FOR ALLOWANCE FOR DOUBTFUL DEBT(AFDD) AFDD= % X (TOTAL ACCOUNT RECEIVABLE- BAD DEBT)

SOLUTION 2:

RECORD INTO JOURNAL ENTRIES

PROVISION FOR DOUBTFUL DEBT

31/12/07 Balance c/d RM 51000 01/1/07 Balance b/d 31/12/07 Bad debt RM 51000 31/12/08 Balance c/d 31/12/08 Bad Debt RM 42000 RM 9000 RM 51000 31/12/09 Balance c/d RM 49000 01/1/09 Balance b/d 31/12/09 Bad Debt RM 49000 RM 51000 RM 42000 RM 7000 RM 49000 01/1/08 Balance b/d RM 0 RM 51000 RM 51000 RM 51000

SOLUTION 3: CONSTRUCT THE FIGURE THROUGH INCOME STATEMENT AND BALANCE SHEET
MAJU AMAR TRADING Income Statement for 2007, 2008, 2009 (Extract) YEAR Gross profit Add: Revenue Decrease in provision for doubtful debt Decrease in provision for discount allowable Less: Expenses 9000 Current Asset Account Receivable Less: P.F.D.D 2007 RM xxx 2008 RM xxx 2009 RM xxx MAJU AMAR TRADING Balance Sheet as at 31 Disember 2007, 2008 and 2009 2007 xxx 399450 51000 393500 51000 7000 2008 xxx 4498700 42000 4456700 2009 xxx 3597500 49000 3548505

Increase in provision for bad debt

Increase in provision for discount allowable

TUTORIAL 3

TUTORIAL 3

Account Receivable = RM25330 RM 330 = RM 25000

Bad Debt

= RM 330

SOLUTION 1: MAKE A TABLE & CATEGORIZE ACC REC 25330 (-) BAD DEBT 330 = BAL C/D (NET DEBTOR) 25000 PFDD (BAL C/D%) 500 (2%)

YEAR 2011

FORMULA FOR ALLOWANCE FOR DOUBTFUL DEBT(AFDD) AFDD= % X (TOTAL ACCOUNT RECEIVABLE- BAD DEBT)

SOLUTION 2: RECORD INTO JOURNAL ENTRIES PROVISION FOR DOUBTFUL DEBT 30/9/08 Balance c/d RM 25000 01/10/07 Balance b/d 30/9/08 Doubtful debt RM 25000 SOLUTION 3: EXTRACTING THE FIGURE THROUGH INCOME STATEMENT BALANCE SHEET MANJA HANDICRAFT SHOPPE Income Statement for 2008 (Extract) YEAR Gross profit Add: Revenue Decrease in provision for doubtful debt Decrease in provision for discount allowable Less: Expenses Increase in provision for bad debt Increase in provision for discount allowable 25000 Current Asset Account Receivable Less: P.F.D.D 2008 RM xxx Balance Sheet as at 30 september 2008 2008 xxx 25000 500 (-) MANJA HANDICRAFT SHOPPE RM 0 RM 25000 RM25000 AND

24500