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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-25
RECORDING OF PROVISION FOR BAD DEBTS
Debit:
Provision for Bad Debts (P&L)
Credit:
Provision for Bad Debts
The debit account is charged against current years profit and the credit head is shown as a deduction from
debtors in the balance sheet.
PRESENTATION OF PROVISION FOR BAD DEBTS
Extract of P&L to show the Provision
Profit and Loss Account for the year ended June 30, 20--
Gross Profit
xxxxx
Less: Admin Expenses
Provision for bad debts
(5,000)
Extract of Balance Sheet to show the Provision
Current Assets
Debtors
100,000
Provision for Bad Debts
(5,000)
95,000
BAD DEBTS & PROVISION FOR BAD DEBTS
When the bad debt for which provision is already made is confirmed, following entry is passed:
Debit:
Provision for Bad Debts
Credit:
Debtors
As expense has already been charged, therefore, no affect is given to P&L at this point.
Reducing the provision
Debit:
Provision for Bad Debts (Balance Sheet)
Credit:
Provision for Bad Debts (P&L)
Increasing the provision
Debit:
Provision for Bad Debts (P&L)
Credit:
Provision for bad debts
166
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Financial Accounting (Mgt-101)
VU
EXAMPLE # 1
Following information is available for A Ltd. For the year ended June 30, 2002.
 Bad Debts During the year
November
1,100
January
640
April
120
 At the year end total debtors amounted to Rs. 68,000 out which Rs. 2,200 is considered to be
doubtful / bad.
Show the relevant accounts and extracts from Profit and Loss and Balance Sheet.
SOLUTION
A Ltd.
Bad Debts Account
Account Code --
Date
Vr. Narration /
Ledger DR.
CR.
Balance
2002
#  Particulars
Code
Amount Amount Dr/(Cr)
Nov 01
Bad Debts
1,100
1,100
Jan
Bad Debts
640
1,740
Apr
Bad Debts
120
1,860
June 30
Transfer to P&L
1,860
0
A Ltd.Provision for Bad and Doubtful Debts(P & L)Account Code --
Date
Vr. Narration /
Ledger DR.
CR.
Balance
2002
#  Particulars
Code  Amount
Amount Dr/(Cr)
Jun 30
Provision for the Year
2,200
2,200
Jun 30
Transfer to P&L
2,200
0
A Ltd. Provision for Bad and Doubtful Debts (B/S)
Account Code --
Date
Vr. Narration /
Ledger DR.
CR.
Balance
2002
#  Particulars
Code  Amount
Amount Dr/(Cr)
Jun 30
Provision for the Year
2,200
(2,200)
PRESENTATION
A Ltd.
Profit and Loss Account for the year ended June 30, 2002
Gross Profit
-------
Less: Expenses
Bad Debts
(1,860)
Provision for bad debts
(2,200)
167
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Financial Accounting (Mgt-101)
VU
Extract of Balance Sheet As On June 30, 2002.
Current Assets
Debtors
68,000
Provision for Bad Debts
(2,200) 65,800
EXAMPLE # 2
A business creates a provision for bad debts @ 5% of its debtors on balance sheet date.
 On Jan 01, 2002 the balance of Provision was 6,600.
 During the year debts written off amounted to Rs. 5,400.
 On December 31, 2002, debtors totaled Rs. 62,000.
 Show Bad debts Account and provision for bad debts account.
SOLUTION
Required closing balance of Provision
62000 x 5% = 3,100
Provision for Bad and Doubtful Debts Account (B/S)
Account Code --
Date
Vr. Narration /
Ledger DR.
CR.
Balance
2002
#  Particulars
Code  Amount
Amount Dr/(Cr)
Jan 01
Opening Balance
6,600
(6,600)
Bad Debts
5,400
(1,200)
Dec 31
Provision for bad debts
1,900
(3,100)
PRESENTATION
Extract of Balance Sheet
Current Assets
Debtors
62,000
Provision for Bad Debts
(3,100) 58,900
CONTROL ACCOUNTS
We have studied about Purchases, Sales, Debtors and Creditors in our previous lectures. We have also
studied that trial balance works as a check of mathematical accuracy of the book keeping. If the trial balance
is not balanced, then it indicates an error in recording of transactions. To detect this error one has to go
through all the transactions during the year to detect the error. Now, if the size of the business is small, it
would be easier to detect the difference. But if the business is large, then it becomes difficult to detect the
difference. To solve this problem, a system of checks is devised so that the ledger accounts are distributed in
smaller groups and a trial is prepared for every group.
Usually with the growth of business, the number of suppliers (creditors) and customers (debtors) grow. So, if
we open a separate ledger account for every creditor and debtor, then the general ledger and trial balance
would become too voluminous to manage. Therefore, in order to simplify things, one ledger each is
maintained for Debtors and Creditors. The Debtors Ledger is called Total Debtors Ledger or Sales Ledger
Control Account (as Credit sales are recorded in this account). The Creditors Ledger is called Total
Creditors Ledger or Purchase Ledger Control Account (as Credit purchases are recorded in this ledger).
In General Ledger one account is kept for all the Debtors, called Debtors Control Account, and one for
Creditors, called Creditors Control Account.
168
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Financial Accounting (Mgt-101)
VU
The principle on which control accounts are based is simple and is as follows:
 If the opening balance of an account is known, together with the total of deductions and additions
entered in the account, the closing balance can be calculated.
 The same method is applied to the whole ledger, the total of opening balances together with the
additions and deductions during the period should give the total of closing balances.
 Therefore, individual creditor's and debtor's accounts are opened in the total creditors' ledger and
total debtors ledger and their summarized figures are posted in the respective Control Accounts in
the General Ledger.
The principle described above can be illustrated as follows:
Take the example of Total Debtors Account:
 Total of Opening Balances Dr.
Rs.
200,000
 Add. Total of Debit entries
Rs.
650,000
850,000
Less Total of Credit entries
Rs.
(300,000)
650,000
The balance of Debtors control account in the general ledger should be Rs. 650,000. If this is not so, then
there is an error in the procedure of recording, which should be traced out.
INFORMATION FOR CONTROL ACCOUNTS ­ DEBTORS
In the above illustration, we used some information. Now we will study the sources from which the
information is obtained.
Type
of Source of Information
Information
Opening  balance List of debtors balances drawn up to the end of previous period.
of debtors
Credit Sales
A separate book is maintained to record individual transactions.
Totals are drawn from this book
Sales Return
A separate book is maintained to record individual transactions.
Totals are drawn from this book
Cheques/Cash
List of receipts is extracted from cash and bank book.
Received
Closing Balance
This is the balancing figure that can also be checked from the list of
individual balance of debtors.
169
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Financial Accounting (Mgt-101)
VU
Consider the following data:
Sales Journal
Date
Invoice #
Name
Amount
Jan,
20--
A
10,000
Jan,
20--
B
12,500
Jan,
20--
C
15,000
Total
37,500
Total of sales journal will be recorded in the Debtors Control Account through the following entry:
Debit:
Debtors Control Account
37,500
Credit:
Sales Account
37,500
Note that cash sales are not included in this whole process. They are directly recorded in the
general ledger.
INFORMATION FOR CONTROL ACCOUNTS ­ CREDITORS
The information flow in case of creditors is similar to debtors, which is listed here:
Opening balance of List of creditors balances drawn up to the end of previous period.
debtors
Credit Purchases
A separate book is (purchase journal) is maintained to record
individual transaction. Totals are drawn from this book
Purchase Return
A separate book is (purchase return journal) is maintained to record
individual transaction. Totals are drawn from this book
Cheques/Cash Paid List of payments is extracted from cash and bank book. Or a separate
column is maintained in cash and bank books for this purpose.
Closing Balance
This is the balancing figure that can also be checked from the list of
individual balance of debtors.
170
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Financial Accounting (Mgt-101)
VU
Consider the following data:
Purchase Journal
Date
Invoice #
Name
Amount
Jan,
20--
X
5,500
Jan,
20--
Y
9,000
Jan,
20--
Z
8,500
Total
23,000
Total of purchase journal will be recorded in the Creditors Control Account through the following entry:
Debit:
Purchases Account
23,500
Credit:
Creditors Control Account
23,500
Note that cash purchases are not included in this whole process. They are directly recorded in the
general ledger.
EXAMPLE # 1
Prepare a Creditors Control Account from the following data and work out the closing balance on April 30,
of creditors.
Apr. 1
Opening Balance
44,500
Totals for May:
Total Credit Purchases
32,000
Purchase Return
6,200
Cheques and Cash paid
28,800
Discounts received
2,500
SOLUTION
Creditors Control Account
Account Code --
Debit Side
Credit Side
Date
No. Narration
Dr. Rs.
Date
No. Narration
Cr. Rs.
April 30
Purchase return
6,200 April 01
Balance B/F
44,500
April 30
Payments
28,800 April 30
Total Purchases
`32,000
April 30
Discounts
2,500
received
Balance C/F
39,000
Total
76,500
Total
76,500
EXAMPLE # 2
Prepare a Debtors control Account from the following data and work out the closing balance on May 31, of
debtors.
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Financial Accounting (Mgt-101)
VU
May 1 Opening Balance
70,000
Totals for May
Total Credit Sales (Sales Journal)
26,000
Returns Inward (Sales Inward Journal)
3,400
Cheques and Cash received
46,000
Discounts allowed
3,700
SOLUTION
Debtors Control Account
Account Code --
Debit Side
Credit Side
Date
No.
Narration
Dr. Rs.
Date
No.
Narration
Cr. Rs.
May1
Bal B/F
70,000 May31
Returns
3,400
May31
Total sales
26,000 May31
Receipts
46,000
May31
Discounts
3,700
May31
Bal C/F
42,900
Total
96,000
Total
96,000
172
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES