Provision for doubtful debts: practice questions

How to approach these questions

These questions test whether you understand that some receivables may never pay, and that prudence requires you to reduce reported receivables to a realistic figure. First separate two things students often blur. A bad debt is a specific amount written off because a customer definitely will not pay.

A provision for doubtful debts is a general estimate against receivables that might not pay. Note whether you must create a new provision, increase it, decrease it, or show its effect in both the income statement and the statement of financial position. Underline the percentage and the receivables figure it applies to, because the base decides everything.

The order of operations matters. First write off any bad debts. The provision is calculated on the receivables that remain.

Debit the bad debts expense account and credit trade receivables. Only then apply the percentage. For example, trade receivables are RM52,000, of which RM2,000 is to be written off.

Receivables fall to RM50,000, and a 4% provision gives RM2,000. Applying 4% to the original RM52,000 would overstate the provision.

In the income statement, use the change in the provision, not the whole provision. Compare the provision required this year with last year's. If last year's was RM1,400 and this year requires RM2,000, only the increase of RM600 is charged as an expense.

If the required provision had fallen to RM1,100, the decrease of RM300 would be shown as income, because you are releasing part of an earlier overestimate. Set out opening provision, required closing provision, and the difference with its direction. Examiners award marks for this even if a later figure is mis-copied.

The statement of financial position is different. Show the full closing provision, not just the movement, deducted from trade receivables to give the net figure expected to be recovered. Trade receivables of RM50,000 less a provision of RM2,000 appear as RM48,000 in current assets.

So the same provision appears twice in different forms. Only the change goes through the income statement. The whole balance reduces receivables in the statement of financial position.

Check your figures by tracing the provision account. It should carry the closing provision as its balance, with the movement posted to or from the income statement. Confirm that a written-off bad debt is not still in receivables when you apply the percentage.

A debt recovered after being written off is credited to bad debts recovered as income, and does not reduce the provision. Recompute net receivables independently.

Marks are mostly lost on these points. The most frequent is charging the whole new provision to the income statement instead of the increase. This counts expense twice in every year after the first.

The reverse trap is forgetting to show a reduction as income. Applying the percentage before writing off known bad debts inflates the provision.

Listing the provision as a liability, instead of deducting it from receivables, is another error. Behind it all are prudence and matching: the estimated loss belongs in the period of the sales.

If you often charge the whole provision instead of the change, one of our teachers can work through a multi-year example with you until the movement becomes automatic. Book a trial class