Question

Alex has decided a provision for bad debts is to be set up in the accounting records. The amount of trade receivables at 31 December 2022 is 33,500. The provision is to be 12% of trade receivables.

Show the double entry in journal format to record any necessary adjustment at 31 December 2022
Identify the change in the statement of financial position on completion of the double entry journal.

Answer 1

The provision for bad debts is calculated at 12% of the trade receivables, amounting to $4,020. The double-entry involves debiting Bad Debts Expense and crediting Provision for Bad Debts. This results in an increase in expenses and a corresponding increase in liabilities on the statement of financial position.

Step-by-step explanation:

Alex has decided to set up a provision for bad debts in the accounting records, which is to be 12% of the trade receivables at the year-end. The total trade receivables as of 31 December 2022 are $33,500. To calculate the provision for bad debts, we multiply the trade receivables by the provision percentage:

Provision for bad debts = $33,500 × 12% = $4,020

Journal Entry:

Dr. Bad Debts Expense (Income Statement) $4,020

Cr. Provision for Bad Debts (Statement of Financial Position, Liability) $4,020

Effect on the Statement of Financial Position:

The creation of a provision for bad debts will result in an increase in expenses on the income statement, which reduces the net income. On the statement of financial position, an increase in liabilities is recorded, as the provision for bad debts is a liability that represents expected future losses on receivables.