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I have a question. Isn’t it proper to write off any bad debts against the provision account? |
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Answer:
There are two scenario when writing off bad debts:
(a) where earlier provision or allowance has been created (b) where no provision is created and the bad debts need to be directly written off into Income Statement ( not a good way as there is no prudency and matching concept is not followed)
For Scenario (a): With provision made: When an accounts receivable actually turns bad, the asset namely the accounts receivable has to be expensed off into the income statement re: the accounting entry is:
Credit: Accounts Receivable $XXX Debit: Provision for doubtful debt $XXX
Meaning that the earlier provision created is transferred or knock off against the accounts receivable making it zero.
For Scenario (b) Direct Write Off However, if earlier there is no provision/allowance for doubtful debts was made, then a direct write off of the accounts receivable is as follows:
Credit: Accounts Receivable $XXX Debit : Bad Debts Written Off (PNL) $XXX
In view of the foregoing, we cannot set-off bad debts written off against provision for doubtful debt.
For illustration:
Take for example Debtor A who owed the company $2,000:
(a) there is no earlier provision created- we have no choice but to: Debit : Bad Debts(PNL) $2,000 Credit: Debtor A (BS) $2000 [ conversion of an asset re: Debtor A into an expense]
(b) however, if the company has already provided for such provision then we can: Debit: Provision for Doubtful debt(BS) $2,000 Credit: Debtor A $2,000
Check out this article:
When the company wants to write off any bad debts, there are certain good practice that needs to be done. Check this out with another article of mine in another site: Accounting treatment on Work Flow on Write Off Bad Debts and Provision for doubtful debts
Other Related Articles:
Different methods of creating provision for doubtful debts
Difference between bad debts written off and provision for doubtful debts
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