When the trial balance shows a balance without deducting bad debt, journal entries will be:
Bad Debt Account Dr.
We have to deduct this bad debt from provision of bad debt, entry will be:
Provision for bad debt Dr.
To Bad Debt
To make current year provision:
P&L A/c Dr.
To Provision for Bad Debt.
Provision for bad and doubt ful account is created according to matching priciples. when the sales of this year is not collectable in subsequent year, to avoid affecting figures of that year, an estimate amount is deducted in current year based on Companies past experience or some other logic. For making provision, will be based on balance in provision account as below:
If the Current year Debtors a/c balance were Rs. 10,000, current yeaer bad debt is Rs 200, firm has to create 3% provion for bad debt and balance in previous year provision account balance is Rs 350, then P&L should be debited with Rs 150, calculated as below:
Current year provision (3% of Rs 10,000): Rs 300
Add: Bad debt written off Rs 200
Less: Previous year balance Rs 350