Bad debts
Bad debts arise when a trade receivable (credit customer) is unable (or
unwilling) to pay the amount owed in respect of goods sold on credit.
Treating a debt as bad is a matter of judgement. A debt may be irrecoverable
because:
The credit customer cannot be traced;
Is not worth taking to Court; or
Has been declared bankrupt.
The ledger entries for bad debts:
The nature of a provision:
A provision is the setting aside of income to meet a known or highly
probable future liability or loss, the amount and/or timing of which
cannot be ascertained exactly, and is thus an estimate.
It is an application of the prudence concept (providing for losses) and
the matching concept (it recognises the loss against the revenue that
generates it.)
Types of provisions for bad/doubtful debts:
A provision for bad debts can consist of either or both of the following:
A specific provision in respect of particular trade receivable (credit
customer) that has been identified as unlikely to pay their debts;
Bad debts arise when a trade receivable (credit customer) is unable (or
unwilling) to pay the amount owed in respect of goods sold on credit.
Treating a debt as bad is a matter of judgement. A debt may be irrecoverable
because:
The credit customer cannot be traced;
Is not worth taking to Court; or
Has been declared bankrupt.
The ledger entries for bad debts:
The nature of a provision:
A provision is the setting aside of income to meet a known or highly
probable future liability or loss, the amount and/or timing of which
cannot be ascertained exactly, and is thus an estimate.
It is an application of the prudence concept (providing for losses) and
the matching concept (it recognises the loss against the revenue that
generates it.)
Types of provisions for bad/doubtful debts:
A provision for bad debts can consist of either or both of the following:
A specific provision in respect of particular trade receivable (credit
customer) that has been identified as unlikely to pay their debts;
