9352 Views

Estimated reading time : 122 Minutes

Adjustments in Final Accounts: Bad Debts, Doubtful Debts, Provision for Bad Debts

Arjun EP

Published on: September 26, 2020

Adjustments in Final Accounts

Adjustment entry means not adjusted while preparing trial balance.

It is also known additional information.

Almost all the adjustment entry effects dual aspect.

One is debit and other is credit.

There are a number of adjustments to be made while finalizing the financial statements.

But our discussion will be limited to the following adjustments (limited by the curriculum):

MAJOR ADJUSTMENTS OF FINAL ACCOUNTS:

1	Dividend	13	Bad debts, provision and discount
2	Transfer to reserve and fund	14	Recovery of bad debts
3	Adjustment of tax	15	Goods loss by fire and insurance claim
4	Closing stock	16	Goods distribute as free sample
5	Outstanding expenses	17	Manager’s commission
6	Prepaid expenses	18	Bonus or pension to employees
7	Accrued revenue or income	19	Create reserve or fund
8	Unearned or prepaid revenue	20	Goods sold on sale or return basis
9	Depreciation on assets	21	Hidden adjustment:
10	Appreciation on assets		(a) Interest on loan or debenture
11	Written off or amortized		(b) Interest on investment
12	Purchase or sale of fixed assets		(c) Monthly rent and salary

Bad Debts, Provision for Bad Debts and Discount

Selling of goods on credit (or service provide on credit) is part of debtors.

It is risky but unavoidable in the modern marketing system.

When debtors are failed to pay their due, it is called bad debts.

Sometimes organization estimates provision for bad debts on debtors.

When cash discount is allowed to receive money earlier, it is called discount on debtors.

When goods are sold on credit with guarantee of recovery, it is called bills receivable or account receivable.

When debtor becomes insolvent, he cannot pay his all dues.

Out of his personal assets, some portion of credit amount can be received.

Uncollected amount is also called bad debts.

After deducting bad debt, there may be provision for bad debt, provision for doubtful debts, reserve for doubtful debts etc; they are also deducted from debtor.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

ADJUSTMENT: 13A

ABC Traders became insolvent and received only 60% of his due of Rs 20,000.

Required: Journal entry

Journal Entry

Date	Particulars		LF	Amount	Amount
	Bank account (Rs 20,000 @ 60%)	Dr		12,000
	Bad debts account (Rs 20,000 @ 40%)	Dr		8,000
	To ABC Traders				20,000
	(Being- debtor became insolvent and received only
	60%of 20,000)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

ADJUSTMENT: 13B

Extracted trial balance

Name of ledgers	Amount Dr	Amount Cr
Debtors	100,000	−
Bad debs	10,000	−
Provision for bad debts		5,000

Additional information:

· Further bad debts is Rs 20,000

· Provision for bad debts is 5%

Required: (a) Journal entry; (b) Show in profit and loss account; (c) Show in balance sheet

SOLUTION:

Journal Entry

Date	Particulars		LF	Amount	Amount
	Bad debts account	Dr		20,000
	To Debtors account				20,000
	(Being- bad debts written off on debtors)
	Provision for bad debts account	Dr		4,000
	To Debtors account				4,000
	[Being- provision bad debts written off (100,000 –
	20,000) @ 5%]

P&L Account

Particulars		Amount	Particulars	Amount
To Bad debt, old	10,000		By Provision for bad debts (old)	5,000
Add: Bad debts, new	20,000
Add: PBD, new	+4,000	34,000

P&L Account

Particulars		Amount	Particulars	Amount
To Bad debt, old	10,000
Add: Bad debts, new	20,000
Add: PBD, new	4,000
Less: PBD, old	(5,000)	29,000

Balance Sheet

Liabilities	Amount	Assets		Amount
		Current assets:
		Debtors	100,000
		Less: Bad debts, new	(20,000)
		Less: PBD, new 5%	80,000
			(4,000)	76,000

#####

Click on link for YouTube videos
Share (Accounting for Share)	http://tiny.cc/889jkz
Share in Nepali	http://tiny.cc/k99jkz
Debentures	http://tiny.cc/yeakkz
Final Account: Class 12	http://tiny.cc/e89jkz
Final Account in Nepali	http://tiny.cc/w89jkz
Work Sheet	http://tiny.cc/579jkz
Ratio Analysis (Accounting Ratio)	http://tiny.cc/4fakkz
Fund Flow Statement	http://tiny.cc/wiakkz
Cash Flow Statement	http://tiny.cc/8gakkz
Theory Accounting Xii	http://tiny.cc/nfakkz
Theory: Cost Accounting	http://tiny.cc/tfakkz
Cost Accounting	http://tiny.cc/p29jkz
LIFO−FIFO	http://tiny.cc/dgakkz
Cost Sheet, Unit Costing	http://tiny.cc/w49jkz
Cost Reconciliation Statement	http://tiny.cc/829jkz

#####

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

ADJUSTMENT: 13C

Extracted trial balance

Name of ledgers	Amount Dr	Amount Cr
Debtors	160,000	−
Bad debs	15,000	−
Provision for bad debts		5,000

Additional information:

Further bad debts is $/₹/Rs 10,000

Provision for bad debts is 5%

Discount allowed to debtors @ 2%

Required: (a) Journal entry; (b) Show in profit and loss account; (c) Show in balance sheet

SOLUTION:

Journal Entries

Date	Particulars		LF	Amount	Amount
	Bad debts account	Dr		10,000	10,000
	To Debtors account
	(Being- bad debts written off on debtors)
	Provision for bad debts account	Dr		7,500
	To Debtors account				7,500
	[Being- provision bad debts (160,000 – 10,000) @ 5%]
	Discount allowed account	Dr		2,850
	To Debtors account				2,850
	[Being- discount allowed (160,000 – 10,000 – 7,500) @ 2%]

P&L Account

Particulars		Amount	Particulars	Amount
To Bad debt, old	15,000		By Provision for bad debts (old)	5,000
Add: Bad debts, new	10,000
Add: PBD, new	7,500
Add: Discount	2,850	35,350

P&L Account

Particulars		Amount	Particulars	Amount
To Bad debt, old	15,000
Add: Bad debts, new	10,000
Add: PBD, new	7,500
Add: Discount	2,850
Less: PDB, old	(5,000)	30,350

Balance Sheet

Liabilities	Amount	Assets		Amount
		Current assets:
		Debtors	160,000
		Less: Bad debts, new	(10,000)
			150,000
		Less: PBD, new 5%	(7,500)
			142,500
		Less: Discount 2%	(2,850)	139,650