Adjustments for Provisions for Doubtful Debts (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Adjustments for Provisions for Doubtful Debts
How do I record the provision for doubtful debts on the financial statements?
Calculate the provision for doubtful debts at the end of the current year
See the revision note Provision for Doubtful Debts for more information
Calculate the difference between:
The provision for doubtful debts at the start of the year
This value will be on the trial balance
And the provision for doubtful debts at the end of the year
This is the value that you need to calculate
The difference is the value that is stated on the income statement
If the provision for doubtful debts increases, the increase is listed with the expenses
Label it provision for doubtful debts
If the provision for doubtful debts decreases, the decrease is listed with the other income
Label it provision for doubtful debts
Record the new balance for the provision for doubtful debts on the statement of financial position
List it underneath trade receivables in the current assets section
Subtract the provision from the value for trade receivables
Worked Example
Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up a provision for doubtful debts which is to be maintained at 4% of trade receivables.
(a) Prepare an extract from the income statement for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.
(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the income statement for the year ended 31 December 2023.
Answer
Part (a)
Calculate the provision for doubtful debts
4% ✕ $24 000 = $960
This is an increase from $0
It will appear as an expense on the income statement
Clara Income Statement (extract) for the year ended 31 December 2022 | |
$ | |
Expenses | |
Provision for doubtful debts | 960 |
Clara Statement of Financial Position (extract) at 31 December 2022 | ||
Current Assets | $ | $ |
Trade receivable | 24 000 | |
Less: provision for doubtful debts | 960 | 23 040 |
Part (b)
Calculate the new provision for doubtful debts
4% ✕ $22 000 = $880
Calculate the difference from the previous provision for doubtful debts
$960 - $880 = $80
This is a decrease
It will appear as other income on the income statement
Clara Income Statement (extract) for the year ended 31 December 2023 | |
$ | |
Other income | |
Provision for doubtful debts | 80 |
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