Do you know what is the difference in Bad Debts, Provision for Doubtful Debts and Bad Debts Recovery?

Due to the impact of Covid-19, the economy has become worse. There are many companies that will face a situation in which the debts cannot be collected.

However, if the companies are unable to collect the debts, what should we do on account?

Don’t worry, let us show you how to do it!

1. Definition：

(a) Bad Debts

- The uncollectible debts from customers.

(b) Provision for Doubtful Debts

- The estimation of future uncollectible debts from customers.

(c) Bad Debts Recovery

- The cash is recovered from bad debts written off previously.

2. What is the document needed to prepare?

(a) Bad Debts

- Issuing reminder notices.

- Legal action

(b) Provision for Doubtful Debts

- The aging report shows customers in slow payment and long outstanding.

(c) Bad Debts Recovery

- The payment slips form customer or Bank receipt.

3. When do we need to do the transaction in account?

(a) Bad Debts

- Once the debts are confirming uncollectible.

(b) Provision for Doubtful Debts

- The debts are overdue but still can be pursued for collection though difficult.

(c) Bad Debts Recovery

- The overdue is received from customers on the bad debts written off.

4. Double Entry：

(a) Bad Debts

Debit Bad Debts Written Off (Expenses)

Credit Account Receivable (Current Assets)

(b) Provision for Doubtful Debts

Debit Allowance for Doubtful Debts (Expenses)

Credit Provision for Doubtful Debts (Current Liabilities)

(c) Bad Debts Recovery

Debit Cash at Bank (Current Assets)

Credit Bad Debts Recovery (Income)

5. Example:

Example 1:

In year 2021, Company A’s account receivable is RM 100,000.00 and RM 10,000.00 is uncollectable due to the customer is bankrupt.

Answer:

The journal entry is debit Bad Debts RM 10,000.00 and credit Account Receivable RM 10,000.00.

Example 2:

In year 2020, Company A's account receivable amounted to RM 200,000.00. Company A decided to provide 5% for doubtful debts on the year.

Answer:

The journal entry is debit Allowance for Doubtful Debts RM 10,000.00 (RM 200,000.00 X 5%) and credit Provision for Doubtful Debts RM 10,000.00 in year 2020.

Example 3:

In year 2021, customer paid RM 1,000.00 to Company B for a debt which had already been written off as bad debts in year 2020.

Answer:

The journal entry is debit Cash RM 1,000.00 and credit Bad Debts Recovery RM 1,000.00 in year 2021.

You may refer to the link for more information of tax treatment on bad debts: Is Provision of Bad Debts eligible for tax deduction?! Is Provision of Bad Debts tax deductible?