ACC 121 LECTURE NOTE
ACCOUNTING TREATMENT FOR BAD AND DOUBTFUL DEBTS
1. INTRODUCTION
One of the major objectives of every business organization is to make profit through sales of
goods and services. In modern business operations, many sales are conducted on credit basis in
order to attract customers and increase sales volume.
Customers who purchase goods on credit are known as trade receivables or debtors. The
expectation of the business is that these debtors will pay their debts at the agreed time. However,
in practice, some customers fail to pay their debts either partially or completely. This leads to
losses known as bad debts and doubtful debts.
Accounting provides proper methods for recognizing, measuring, recording, and reporting these
losses in the financial statements.
The accounting treatment for bad and doubtful debts is very important because it ensures that:
Assets are not overstated
Profit is not overstated
Financial statements show true and fair values
Anticipated losses are recognized early
2. LEARNING OBJECTIVES
At the end of this lecture, students should be able to:
1. Explain the meaning of bad debts and doubtful debts.
2. Identify causes of bad debts.
3. Explain the concept of provision for doubtful debts.
4. Distinguish between bad debts and doubtful debts.
5. Prepare journal entries for all treatments relating to bad debts.
6. Prepare ledger accounts involving bad debts and provisions.
7. Show the presentation in financial statements.
8. Explain recovery of bad debts.
9. Prepare comprehensive adjustments involving bad debts and provisions.
10. Solve examination-standard questions on bad debts.
3. CREDIT SALES AND TRADE RECEIVABLES
Meaning of Credit Sales
Credit sales refer to sales of goods or services where payment is deferred to a future date.
Meaning of Trade Receivables
Trade receivables are persons or organizations owing the business money as a result of credit
sales.
Examples
Customers buying goods on account
Clients receiving services before payment
4. MEANING OF BAD DEBTS
Bad debts are debts that have become completely irrecoverable and are therefore written off from
the accounting records.
A debt becomes bad when there is no reasonable hope of recovery.
5. CAUSES OF BAD DEBTS
Bad debts may arise due to several reasons, including:
(a) Bankruptcy
When a customer becomes legally bankrupt and unable to pay creditors.
(b) Insolvency
When liabilities exceed assets and the debtor cannot meet obligations.
(c) Death of Debtor
Especially where there are no assets to settle the debt.
(d) Fraudulent Practices
Some debtors deliberately avoid payment.
(e) Poor Economic Conditions
Economic recession may affect customers’ ability to pay.
(f) Disappearance of Debtor
A debtor may relocate or disappear without trace.
(g) Dispute Over Goods
Customers may refuse payment due to disagreement over quality or quantity supplied.
6. CHARACTERISTICS OF BAD DEBTS
It arises from credit transactions.
It represents business loss.
It reduces net profit.
It is treated as an operating expense.
It reduces trade receivables.
7. ACCOUNTING TREATMENT OF BAD DEBTS
When a debt is confirmed irrecoverable, it must be removed from the books.
7.1 Journal Entry for Writing Off Bad Debts
Dr Bad Debts Account
Cr Trade Receivables Account
Explanation
Bad Debts Account is debited because it is an expense or loss.
Trade Receivables Account is credited because the debtor no longer owes the business.
7.2 Illustration
A customer owing ₦30,000 becomes bankrupt.
Journal Entry
Dr Bad Debts Account ₦30,000
Cr Trade Receivables Account ₦30,000
7.3 Posting to Ledger Accounts
Bad Debts Account
Dr Bad Debts Account Cr
Date Particulars ₦
xx Debtors 30,000
xx Profit & Loss 30,000
Debtors Account
Dr Debtors Account Cr
Date Particulars ₦
Dr Debtors Account Cr
xx Bad Debts 30,000
8. BAD DEBTS RECOVERED
Sometimes debts previously written off may later be recovered.
This may happen if:
The debtor’s financial condition improves
Bankruptcy restrictions are lifted
The debtor voluntarily pays later
8.1 Accounting Treatment for Recovery of Bad Debts
Dr Cash/Bank Account
Cr Bad Debts Recovered Account
The recovered amount is treated as income.
8.2 Illustration
A debt of ₦10,000 written off last year was recovered.
Journal Entry
Dr Cash Account ₦10,000
Cr Bad Debts Recovered Account ₦10,000
9. DOUBTFUL DEBTS
Doubtful debts are debts that may possibly become bad in the future.
The business is uncertain whether the customers will pay.
10. PROVISION FOR DOUBTFUL DEBTS
Provision for doubtful debts is an estimated amount set aside from profit to cover anticipated
losses arising from non-payment by debtors.
It is also known as:
Allowance for doubtful debts
Provision for bad debts
11. NEED FOR PROVISION FOR DOUBTFUL DEBTS
Provision is necessary because of the following accounting principles:
(a) Prudence Concept
This principle states that:
Anticipated losses should be recognized immediately.
Anticipated profits should not be recognized until realized.
(b) Matching Concept
Expenses relating to revenue earned in a period should be charged against that revenue in the
same accounting period.
(c) True and Fair View
Provision ensures receivables are shown at realizable value.
12. METHODS OF ESTIMATING PROVISION
(A) Percentage of Total Debtors
A fixed percentage is applied to total receivables.
Example:
Debtors = ₦400,000
Provision = 5%
0.05 \times 400{,}000 = 20{,}000
Provision = ₦20,000
(B) Percentage of Credit Sales
Provision is calculated as percentage of credit sales.
(C) Aging Analysis Method
Older debts are more likely to become bad.
Debtors are grouped according to length of time outstanding.
Example:
Age Amount Rate
1–30 days ₦100,000 2%
31–60 days ₦80,000 5%
Above 60 days ₦50,000 10%
13. ACCOUNTING TREATMENT OF PROVISION FOR DOUBTFUL DEBTS
13.1 Creating a New Provision
Suppose:
Debtors = ₦500,000
Provision rate = 4%
Calculation:
0.04 x 500,000 = 20,000
Journal Entry
Dr Profit and Loss Account ₦20,000
Cr Provision for Doubtful Debts Account ₦20,000
13.2 Increasing Existing Provision
Suppose:
Old provision = ₦15,000
New provision = ₦25,000
Increase:
25,000 - 15,000 = 10,000
Journal Entry
Dr Profit and Loss Account ₦10,000
Cr Provision for Doubtful Debts Account ₦10,000
13.3 Decreasing Existing Provision
Suppose:
Old provision = ₦30,000
New provision = ₦18,000
Decrease:
30,000 - 18,000 = 12,000
Journal Entry
Dr Provision for Doubtful Debts Account ₦12,000
Cr Profit and Loss Account ₦12,000
14. WRITING OFF BAD DEBTS AGAINST PROVISION
When provision already exists and a debt later becomes bad:
Journal Entry
Dr Provision for Doubtful Debts Account
Cr Trade Receivables Account
Explanation
The debt is removed from receivables.
No further expense is charged to profit because provision already covered the anticipated
loss.
15. PROVISION FOR DISCOUNT ON DEBTORS
Some businesses allow cash discounts to customers who pay promptly.
Provision may also be created for expected discounts.
15.1 Accounting Treatment
Dr Profit and Loss Account
Cr Provision for Discount on Debtors
15.2 Example
Debtors = ₦200,000
Provision for doubtful debts = ₦10,000
Discount rate = 2%
Adjusted debtors:
200,000 - 10,000 = 190,000
Provision for discount:
0.02 x 190,000 = 3,800
16. PROVISION FOR DISCOUNT ON CREDITORS
A business may expect to receive discounts from creditors for prompt payment.
This anticipated gain is treated differently because gains are not anticipated under prudence
principle.
Hence:
Provision for discount on creditors is less commonly recognized.
17. PRESENTATION IN THE FINANCIAL STATEMENTS
Statement of Profit or Loss
Expenses ₦
Bad Debts xxx
Increase in Provision xxx
Statement of Financial Position
Current Assets ₦
Trade Receivables xxx
Less: Provision for Doubtful Debts (xxx)
Net Receivables xxx
18. COMPREHENSIVE ILLUSTRATION
At 31 December 2025:
Debtors = ₦800,000
Bad debts = ₦40,000
Provision = 5%
Step 1: Write Off Bad Debts
Adjusted debtors:
800,000 – 40,000 = 760,000
Step 2: Calculate Provision
0.05 x 760,000 = 38,000
Journal Entries
Bad Debt
Dr Bad Debts Account ₦40,000
Cr Trade Receivables Account ₦40,000
Provision
Dr Profit and Loss Account ₦38,000
Cr Provision for Doubtful Debts Account ₦38,000
Statement of Financial Position
Trade Receivables ₦
Debtors 800,000
Less: Bad Debts (40,000)
Adjusted Debtors 760,000
Less: Provision (38,000)
Net Receivables 722,000
19. DIFFERENCE BETWEEN BAD DEBTS AND PROVISION FOR DOUBTFUL
DEBTS
Basis Bad Debts Provision for Doubtful Debts
Meaning Actual irrecoverable debt Estimated future bad debts
Nature Actual loss Expected loss
Timing Already occurred Anticipated
Treatment Written off Provided for
Effect on Profit Immediate expense Estimated expense
20. ADVANTAGES OF PROVISION
Prevents overstatement of assets
Ensures accurate profit
Helps future planning
Complies with accounting principles
Reflects realistic receivable value
21. DISADVANTAGES OF PROVISION
Based on estimation
May reduce reported profit
Can be manipulated by management
24. PRACTICAL QUESTIONS
Question 1
A business had the following balances:
Debtors = ₦900,000
Bad debts = ₦50,000
Provision for doubtful debts = 4%
Required:
1. Write journal entries.
2. Calculate provision.
3. Prepare statement of financial position extract.
Question 2
The provision for doubtful debts account had an old balance of ₦25,000. The new provision
required is ₦40,000.
Required:
Prepare journal entry for adjustment.
25. CONCLUSION
The accounting treatment of bad and doubtful debts is an essential area in financial accounting. It
ensures proper recognition of losses arising from credit transactions and prevents overstatement
of profits and assets. Every accountant must understand how to record bad debts, maintain
provisions, prepare ledger accounts, and present these items correctly in financial statements.
SOLUTION TO PRACTICAL QUESTIONS
QUESTION 1
A business had the following balances:
Debtors = ₦900,000
Bad debts = ₦50,000
Provision for doubtful debts = 4%
Required:
1. Write journal entries.
2. Calculate provision.
3. Prepare Statement of Financial Position extract.
STEP 1: WRITE OFF BAD DEBTS
Bad debts must first be removed from debtors.
Adjusted debtors:
900,000 - 50,000 = 850,000
Adjusted debtors = ₦850,000
STEP 2: CALCULATE PROVISION FOR DOUBTFUL DEBTS
Provision = 4% of adjusted debtors
0.04 x 850,000 = 34,000
Provision for doubtful debts = ₦34,000
REQUIRED 1: JOURNAL ENTRIES
(a) Writing Off Bad Debts
Dr Bad Debts Account ₦50,000
Cr Trade Receivables Account ₦50,000
Explanation
The irrecoverable debt is removed from receivables and treated as an expense.
(b) Creating Provision for Doubtful Debts
Dr Profit and Loss Account ₦34,000
Cr Provision for Doubtful Debts Account ₦34,000
Explanation
Provision is created for debts that may become bad in future.
REQUIRED 2: CALCULATION OF PROVISION
Particulars ₦
Total Debtors 900,000
Less: Bad Debts (50,000)
Adjusted Debtors 850,000
Particulars ₦
Provision @ 4% 34,000
REQUIRED 3: STATEMENT OF FINANCIAL POSITION EXTRACT
Statement of Financial Position (Extract)
Current Assets ₦
Trade Receivables 900,000
Less: Bad Debts (50,000)
Adjusted Debtors 850,000
Less: Provision for Doubtful Debts (34,000)
Net Trade Receivables 816,000
QUESTION 2
The provision for doubtful debts account had an old balance of ₦25,000. The new provision
required is ₦40,000.
Required:
Prepare journal entry for adjustment.
STEP 1: DETERMINE THE CHANGE IN PROVISION
Increase in provision:
40,000 - 25,000 = 15,000
Increase = ₦15,000
STEP 2: JOURNAL ENTRY
Dr Profit and Loss Account ₦15,000
Cr Provision for Doubtful Debts Account ₦15,000
EXPLANATION
The old provision already existing is ₦25,000.
The business now requires a provision of ₦40,000.
Therefore, only the increase of ₦15,000 is charged to Profit and Loss Account.
LEDGER ACCOUNT FOR QUESTION 2
Provision for Doubtful Debts Account
Dr Provision for Doubtful Debts Account Cr
Date Particulars ₦
Balance b/d 25,000
Profit & Loss 15,000
Balance c/d 40,000
ALTERNATIVE SCENARIO (IF PROVISION DECREASES)
Suppose:
Old provision = ₦40,000
New provision = ₦25,000
Decrease:
40,000 - 25,000 = 15,000
Journal Entry
Dr Provision for Doubtful Debts Account ₦15,000
Cr Profit and Loss Account ₦15,000
Explanation
The excess provision is written back as income.