Reduction in Provisions for Bad or Doubtful Debts

true-tamplin_2x_mam3b7

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 22, 2023

At the end of a financial year, if a business person feels that provisions for bad debts brought forward from the previous year are excessive, they can reduce them to a level that, in their opinion, represents a more accurate probable loss.

The following journal entry is made to record a reduction in provisions for bad or doubtful debts:

Example

On 31 December 2017, David's trade debtors stood at $432,000 only. However, David still wants to maintain a provision for bad debts at 2% of debtors.

Required: Show the relevant entries.

At the end of 2017, provisions for bad debts should be 2% of $432,000 = $8,640.

However, there already exists a provision of $9,200, which is brought forward from 2016. Therefore, this should be reduced by $560 ($9,200 — 8,640).

Journal Entry for 2017
Provisions for Bad Debts Account
Profit and Loss Account Excerpt
Balance Sheet Excerpt

Reduction in Provisions for Bad or Doubtful Debts FAQs

true-tamplin_2x_mam3b7

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.