Bad Debts, Provision for Bad Debts, Debtors Control
Q: How does bad debts and the provision for bad debts affect the debtors control account?
A: Let's make sure we fully understand what these terms are before I answer your question.
Bad debts are debts owed to the business that have become bad, meaning it seems they are uncollectable.
For example, Joe Shmo, who owed you R1,000 (R = Rands = South African currency), files bankruptcy and informs you of this. So it seems we won't get paid by Joe in future.
The original journal entry to record the sale would have been: Dr Debtors Control R1,000 Cr Sales R1,000
When we become aware that someone won't pay us (that the debt has become 'bad'), we do an entry as follows: Dr Bad debt (expense) R1,000 Cr Debtors Control R1,000
The provision for bad debts is not the same as bad debts.
The provision for bad debts is an estimate of the debts owed to us that will go bad in the future. We record this future loss of debts as soon as we are aware that we will definitely lose money in the future.
For example, let's say that at the end of the year we have R200,000 in debtors control. We expect 2% of debts owed to us to go bad in future. This amounts to R4,000 of our current debts. We're pretty sure we will lose this amount in the future. So we record this provision.
The entry to record this provision for bad debts is: Dr Bad debts (expense) R4,000 Cr Provision for Bad Debts (like a liability) R4,000
Here are what the T-accounts for the debtors control and also the provision for bad debts would look like:
As you can see, the provision for bad debts is kept as a completely separate account to the debtors control.
These two accounts are, however, set off against one another in the balance sheet in order to present the true value of debtors. In our example above, the "Trade and other debtors" in our balance sheet would be shown as R196,000 (R200,000 - R4,000).
Note that the "provision for bad debts" is also known by a few other names, such as: the "allowance for doubtful debts," the "allowance for bad debts" or the "allowance for doubtful accounts."
See below for more comments, questions and answers on bad debts and the provision/allowance.
There are full lessons, examples and exercises on bad debts and provision for bad debts in my accounting books.