1

BAD DEBTS (vu lecture #24 & 25)

Debts:-
The amount recoverable from the person to whom sales is made is called debts. Following are three types of
debts.
Debt

Good debts Bad Debts Doubtful debts

Good Debts:
The portion of the debts that is recoverable from the debtors.
Bad Debts
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RMATINET
Circumstances Led to Bad Debts
1-Disapearance of a Debtor’s business 2-Insolvency of a debtor
3-Death of a debtor 4-Failure of repeated attempt to collect the debt
Doubtful Debts
If there is uncertainty or doubt that amount will not recover. Such uncertain debts are doubtful debts.
Provision for Doubtful Debts
Bad Debts Reserve or Allowances for uncollectible
It will hold an amount to reduce the Debtors ledger due to non-collection of debts and it is shown contra
in balance sheet.
Illustration No.1: Bad debts old provision balance is Rs.1500, actual bad debts is Rs.1200, Closing
Debtors is Rs.20000 and New provision for doubtful debts is 5% . Then journal entries will be as follow:-
Journal Entries
Date Particulars Ref. Dr. (In Rs.) Cr. (In Rs.)
Bad Debts Account 1200
Debtor Account 1200
Actual bad debts recorded.

Provision for Doubtful Debts Account 1200

Bad Debt Account 1200
Transferring Bad debts to Provision for Doubtful Debts Account.

Profit & Loss Account 700

Provision for Doubtful Debts Account 700
Provision for doubtful debts 5% on Sunday Debtors

Calculation Of Provision for Doubtful Debts

Suppose old provision is Rs.1500 Then calculation is as follow Rs.
Bad Debts 1200
Add: Provision for doubtful debts (Rs.20000x5%) 1000
2200
Less: Old Provision 1500
700
If the old provision is greater than the total bad debts a reverse entry for provision will be passed.
Prepared by Syed Khalid Masood cell #03008165123
 2

LEDGERS
Debtor Account
AMOUNT
DATE PARTICULARS J/F AMOUNT (RS.) DATE PARTICULARS J/F (RS.)
Debtors account 1200 Provision for doubtful debts 1200
1200 1200
Provision for Doubtful Debts
AMOUNT
DATE PARTICULARS J/F AMOUNT (RS.) DATE PARTICULARS J/F (RS.)
Bad debt account 1200 Balance b/d 1500
Balance c/d 1000 Profit & loss account 700
2200 2200

Difference Between Old & New Provision

Old provision is balance of last year while new provision is created in the current year.

BAD DEBTS RECOVERED ALREADY WRITTEN OFF

Bad debts recovered Rs.10000
DATE PARTICULARS REF. DR. (RS.) CR.(RS)
Cash account 10000
Bad debts recovered 10000
Bad debts recovered already written off
Treatment of Bad Debts in Profit & Loss Account
Formula (BANO)
B Bad Debts (old)

A Add: Allowances for Bad debts New (Debtors –New Bad Debts) XProvision%

N Add: New Bad Debts

Total= B+A+N (by adding all three above)

O Less: Old Provision for Bad Debts.

The answer of the above formula will be treated as Expense and if the Old provision (O) is greater than the
total of (B-A-N) then the answer will be an income.

Formula (In case Discount on Debtor is given)

B Bad Debts (old)

A Add: Allowances for Bad debts New (Debtors –New Bad Debts) xProvision%

N Add: New Bad Debts

Total= B+A+N (by adding all three above)

Add: Provision for discount on Debtors=(Debtors –New Bad Debts-New Provision) x Discount%
 Less: Old Provision for Bad Debts.

Prepared by Syed Khalid Masood cell #03008165123

 3
Illustration No.2: Suppose ABC College of Commerce, Kasur books shows that Debtors are Rs.26400, In
trial balance Bad debts Rs.600 and provision for doubtful debts is Rs.1480 while in adjustments Bad Debts
Rs.1400, Provision for Bad debts is 4% and Discount on debtors is 2%. Calculate the amount charged to Profit
& Loss Account.
Solution: Bad Debts (trial balance) Rs.600
Add: Bad debts Adjustments 1400
Add: New Provision (Rs.26400-Rs.1400) x 4% 1000
Add: Discount provision (Rs.26400-Rs.1400-Rs.1000) x 2% 480
Total 3480
Less: Old Provision for Bad debts (given in trial balance) 1480
The amount charged to Peofir & Loss Account (Expense) 2000
Treatment of Bad Debts in Balance Sheet
S. Debtors Less Bad Debts New less New Provision Less Discount on Debtors
OR
Sundary Debtors
Less: New Bad Debts
Add: New Provision for Doubtful Debts
Add: Discount on Debtors

Illustration No.3: Following information are extracted from books of Mr. XYZ
Closing value of stock Rs.40,000, Write off Bad debts (given in adjustments) Rs.2,400,
Sundry Debtors (given in trial balance) 33,200 and Provision is created on Debtors at 10%
Identify the Total amount deducted from Sundry debtors?
(i) Rs. 460 (ii) Rs. 2,400 (iii) Rs. 3,080 (iv) Rs.5480
Solution:
Rs2400
Bad Debts Adjustment (New) Rs3080
Add: Provision created (Rs.33200-Rs.2400)x10%
Answer Rs.5480
IMPORTANT CONCEPTS
Distinction between Bad debts and doubtful debts
1- Bad debts are confirmed loss while doubtful debts are expected loss of the business.
2- Bad debts are shown in P & L account while provision for doubtful debts is shown on both P & L
account and Balance Sheet.
3- No provision is necessary for bad debts while provision is must for doubtful debts.
4- Bad debts are charged to debtors account while doubtful debts are not charged to debtors account.
Distinction between Provision and Reserve
1- Provision is a charge to the profit whilst a reserve is an appropriation to the profit.
2- Provision is kept for definite liability whereas Reserve is the remaining amount of profit after all
charges.
3- Provision is liability or negative asset whereas reserve is a portion of owner’s equity.

MCQS
1-On 31st December, 2007, the sundry debtors are amounted to Rs.40,000. On the basis of past experience,
it is estimated that 10% of the sundry debtors are doubtful. Actual bad debts are Rs. 1600. What amount
of new provision for doubtful debts will be credited in profit & loss account
(i)_ Rs. 3,600 (ii)- Rs. 4,000 (iii)_ Rs. 1,600 (iv)_ Rs. 2, 400

Prepared by Syed Khalid Masood cell #03008165123

 4
2-Consider the following data and identify the amount which will be shown in profit & loss account. Bad
debts Rs.3,500, Provision for doubtful debts (old) Rs.6,000, Current year’s provision (new) Rs. 1,500.
(i)_ Rs. (1,000) (ii)_ Rs. 1,000 (iii)_ Rs. (5,000) (iv)_ Rs. 5,000
3- Old provision of bad debts is shown ------------of trial balance.
(i)_ Debit side (ii)_positive side (iii)_ Credit side (iv)_ Negative side

4-In which of the following condition(s) DEBT is regarded as BAD.

(i)_ Bankruptcy of the debtor (ii)_ Disappearance of debtor’s business
(iii)_ Failure of repeated attempt to collect the debt (iv)_ All of the given options
5-Which of the following entry will be recorded when the Bad Debts are recovered?
(i)_ Cash account (Dr.) & Bad Debts recovered account (Cr.)
(ii)_ Accounts Receivable account (Dr.) & Bad Debts recovered account (Cr.)
(iii)_ Bad debts recovered account (Dr.) and Profit & Loss account (Cr.)
(iv)_ Provision for doubtful debts account (Dr.) & Cash account (Cr.)
6-If the (New provision + Bad debts) > Amount of old provision then resulting figure will be shown at:
(i) Debit side of Profit & Loss Account (ii) Credit side of Profit & Loss Account
(iii) Asset side of Balance Sheet (iv) Liability side of Balance Sheet
7-Which of the following would be deducted from Sundry Debtors in Balance Sheet?
(i) Bad debts (Trial balance item ) (ii) Old provision for doubtful debts
(iii) New provision for doubtful debts
(iv) Both Bad debts (given in adjustment) and new provision for doubtful debts
8-Which of the following option is TRUE about the characteristic(s) of Bad Debt?
(i) It is a definite loss to the business (ii) It is not shown in Balance Sheet
(iii) No provision is necessary for it (iv) All of the given options
9-Consider the following data and identify the amount which will be shown in profit & loss account. Bad
debts Rs.1,600, Provision for doubtful debts (old) Rs.2,000 & Current year’s provision (new) Rs.1,000
(i) _ Rs. 1600 (ii) _ Rs. 600 (iii) _ Rs. 2,000 (iv)_ Rs. 2,600
10-A sum of Rs. 200 written off as bad debt now received credited to the account of bad debts recovered
account would:
(i) Decrease the profit by Rs.200 (ii) Remains constant and no effect on net profit
(iii) Increase the net profit by Rs.200 (iv) There is no relation between debtor and profit
11-If the provision for doubtful debts is not created, which of the following entry is passed to record the
bad debts in control account?
(i)_ Bad debts (Dr) and Debtors Control A/c (Cr)
(ii)_ Allowance for doubtful debts (Dr) and Debtors Control A/c (Cr)
(iii)_ Allowance for doubtful debts (Dr) and Debtors A/c (Cr)
(iv)_ Debtors Control A/c (Dr) and Allowance for doubtful debts (Cr)
12-If Bad Debts written off are given in adjustment, then which of the following entry for bad debts
written off is CORRECT?
(i) Bad debts a/c (Dr) and Trading a/c (Cr) (ii) Provision for Bad and Doubtful debts a/c (Dr) and Bad debts
a/c(Cr)
(iii)Bad debts a/c (Dr) and debtors a/c (Cr) (iv) Trading a/c (Dr) and Bad debts a/c (Cr)
13- Books of Mr. XYZ shows Bad Debts (Given in trial balance) 500, Old provisions (Given in trial
balance) 800, Sundry Debtors (Given in trial balance) 44,500 and Provision for doubtful debts @ 5%.
What will be the amount of new provision ?
(i)_ Rs. 2,225 (ii)_ Rs. 2,525 (iii)_ Rs. 1,925 (iv)_ Rs. 3,025

Prepared by Syed Khalid Masood cell #03008165123

 5
14- books of ABC college of Commerce, Kasur shows Closing value of stock Rs.40,000, Bad debts (given
in adjustments) Rs.2,400, Sundry Debtors (given in trial balance) Rs.33,200, Provision is created on
Debtors at 5% . Identify the total amount which will deduct from Sundry debtors.
(i)_ Rs. 460 (ii)_ Rs. 3,940 (iii)_ Rs. 1,540 (iv)_ Rs. 2,400
15-On 31stDecember, 2007, the sundry debtors are amounted to Rs.40,000. On the basis of past
experience, it is estimated that 5 % of the sundry debtors are doubtful. Actual bad debts are Rs. 1600.
What amount of new provision for doubtful debts will be credited in profit & loss account.
(i) _ Rs. 3,600 (ii)_ Rs. 2,000 (iii)_ Rs. 1,600 (iv)_ Rs. 400

ANSWERS MCQS
1-(iv) 2-(i) 3-(iii) 4(iv) 5-(i) 6-(i) 7-(iv) 8-(iv)
9-(ii) 10-(iii) 11-(i) 12-(iii) 13-(i) 14(ii) 15-(iv)

ABC COLLEGE & ACADEMY KASUR’S EXCELLENT PERFORMANCE 2009

MBA-I
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc090408457 Syed Khalid Masood 3.80 Kasur college of IT, KASUR
2 mc090410145 M. Inaam 3.72 Kasur college of IT, KASUR
3 mc090407903 Hafiza Nida 3.58 Kasur college of IT, KASUR
4 mc090404007 Qurat Ul Ain 3.56 Kasur college of IT, KASUR
5 mc090409786 Saima Nasreen 3.51 Kasur college of IT, KASUR
6 Mc090406525 Muhammad Usman 3.45 Kasur college of IT, KASUR
7 mc090409762 Aftab Sarwar 3.37 Kasur college of IT, KASUR
8 Mc090404069 Muhammad Zubair 3.36 Kasur college of IT, KASUR
9 Mc090404110 Samina Ameer Din 3.12 Kasur college of IT, KASUR
10 Mc090404111 Ayesha Jabeen 3.09 Kasur college of IT, KASUR

MBA-II
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc090201715 Jawad Ali Razzaq 3.51 Kasur college of IT, KASUR
MBA-III
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc080403976 Shamama Altaf 3.77 Kasur college of IT, KASUR
2 mc080401937 Amna Noreen 3.16 Kasur college of IT, KASUR
3 mc080408335 Mehboob 3.16 Kasur college of IT, KASUR

STATEMENT OF CASH FLOWS(vu lectures 41 to 44)

Prepared by Syed Khalid Masood cell #03008165123
 6
Definition: It consists on Cash Receipts and Cash Payments. All cash receipts & payments are presented in
three parts named operating activities, investing activities and financing activities
Purpose & Importance of Cash Flow Statement:
Cash flow statement is useful for the management of an organization, creditors, investors etc in assessing the
organization ability to pay dividend, liabilities, expenses and generating positive cash flow. In short, it helps
users to evaluate short term as well as long term company ability to have sufficient cash.
Classification of Cash Flows:

Operating Activities Investing Activities Financing Activities

This section deals Current This section deals Fixed This section deals Long
Assets & Current Liabilities Assets, Intangible Assets term liabilities & owner’s
and shows effect of and Long Term equity.
revenues and expenses. Investments.

RULES OF ADDITIONS / DEDUCTIONS IN CASH FLOW STATEMENT

Increase in Assets = Deduction from Cash Flow Statement

Decrease in Assets = Addition in Cash Flow Statement
Increase in Liabilities = Addition in Cash Flow Statement
Decrease in Liabilities = Deduction from Cash Flow Statement
Increase in Owner’s Equity = Addition in Cash Flow Statement
Decrease in Owner’s Equity = Deduction from Cash Flow Statement

Methods of Presenting Statement of Cash Flows

1- Indirect Method 2-Direct Method
Net profit before Tax
Less: All Other Incomes 1-Operating Activities
Add: All Non-Cash Expenses Cash received from customer
(like Depreciation) Add: Other operating cash receipts
Add: All Other Expenses Less: Payment to suppliers / employees
1-Operating Activities Less: Paid interest / tax
Add: Decrease in Current Assets 2-Investing Activities
Less: Increase in Current Assets Add: Decrease in Fixed Assets
Add: Increase in Current Liabilities Less: Increase in Fixed Assets
Less: Decrease in Current Liabilities 3-Finanacing Activities
2-Investing Activities Add: Increase in Long Term Liabilities
Add: Decrease in Fixed Assets Less: Decrease in Long Term Liabilities
Less: Increase in Fixed Assets Add: Increase in Owner’s Equities
3-Finanacing Activities Less: Decrease in Owner’s Equities
Add: Increase in Long Term Liabilities
Less: Decrease in Long Term Liabilities Add: Opening Cash Balance ( given )
Add: Increase in Owner’s Equities =Closing Cash Balance
Less: Decrease in Owner’s Equities

Add: Opening Cash Balance ( given )

=Closing Cash Balance

Dividend received, interest received and interest expenses are operating

Important activities because these are entered income statement whereas Dividend
Point paidKhalid
Prepared by Syed will beMasood
treated ascell
financing activity because dividend paid is
#03008165123
entered in Profit & Loss Appropriation Account.
 7

Illustration # 1: Classify the following transactions into an operating activity, an investing activity or a
financing activity. Also tell the reason of such classification:
1-Loan taken from bank that is payable after 5 years.
2-Cash received from debtors.
3-Dividend paid to share holders.
4-Cash proceeds from plant & machinery.
5-Salary paid to employees
6-Depreciation of office building.
7-Furniture purchased.
8-Interest received from bank.
9- Deposited cash into bank account.
10-Issued capital to the general public.
Solution:
Sr. # Activity Reason
1- Financing It is long term liability therefore treated as financing activity.
2- Operating Debtors are current assets therefore treated as operating activity.
3- Financing Dividend paid is distribution of profit and is not an expense therefore it is
treated as financing activity.
4- Investing Plant & machinery is fixed asset therefore it is treated as investing activity.
5- Operating This routine transaction related to daily business operation therefore treated as
operating activity.
6- x Non-cash item. Depreciation is actually not paid to anyone.
7- Investing Furniture is fixed asset therefore it is treated as investing activity.
8- Operating This routine transaction related to daily business operation therefore treated as
operating activity.
9- x No effect
10- Financing It is related to owner’s equity therefore treated as financing activity.
Illustration # 2: Labba International’s books shows the following information.
Opening Cash balance is Rs.63000, net increase in current assets is Rs.54000, closing cash balance Rs.580000, net
decrease in fixed assets Rs.175000 , net increase in current liabilities Rs. 112000 , New common stock (shares) issued
Rs.50000. Net profit before tax is Rs. 218000 and depreciation charged Rs.16000. Calculate cash flow statement from the
above information.
Solution: Amount (in Rs.) Amount (in Rs.)
Net profit before Tax 218000
Add: Depreciation 16000
Operating profit before working capital changes 234000
1-Operating Activities
Add: Increase in Current Liabilities 112000
Less: Increase in Current Assets (54000) 58000
2-Investing Activities
Add: Decrease in Fixed Assets 175000
3-Finanacing Activities
Add: Increase in Owner’s Equities 50000
Net increase in cash & cash equivalents 517000
Add: Opening Cash Balance 63000
=Closing Cash Balance 580000
Illustration # 3: The comparative financial statement data for XYZ Company is given below:
Prepared by Syed Khalid Masood cell #03008165123
 8
December 31 December 31
Assets: 2007 2006
Rs. Rs.
Cash 4,000 7,000
Accounts receivable 36,000 29,000
Inventory 75,000 61,000
Plant and equipment 210,000 180,000
Accumulated depreciation (40,000) (30,000)
Total Assets 285,000 247,000
Liabilities & Stockholder’s equity:
Accounts payable 45,000 39,000
Common stock 90,000 70,000
Retain earnings 150,000 138,000
Total liabilities & Stockholder’s equity 285,000 247,000
For 2007, the company reported net income as follows:
XYZ Company
Income Statement
For the year ended 31st December, 2007
Rs.
Sales 500,000
Less: Cost of goods sold 300,000
Gross margin 200,000
Less Operating expenses 180,000
Net Income 20,000
Required:Prepare a Statement of Cash Flows if dividend of Rs. 8,000 was declared and paid
during the year 2007. There were no sales of plant and equipment during the year.(vu, Final Fall 2008)
Solution: Rs. Rs.
Net income 20,000
Add: adjustment for non cash items
Depreciation (Accumulated Depreciation Rs.40000-Rs.30000) 10,000
Operating profit before working capital changes: 30,000
Cash Flows from Operating Activities:
Less: Increase in inventories Rs.75,000-Rs.61,000 (14,000)
Less: Increase in accounts receivable Rs.36,000-Rs.29,000 (7,000)
Add: Increase in accounts payable Rs.45,000-Rs.39,000 6,000
Cash generated from operations (15,000)
Cash Flows from Investing Activities:
Less:Plant and equipment purchased Rs.210,000-Rs.180,000 (30000)
Cash Flows from Financing Activities:
Add: Common Stock Rs.90,000-Rs.70,000 20,000
Less: Dividend declared & paid during the year (8,000) 12,000
Net decrease in cash & cash equivalents (3,000)
Add: Opening Cash Balance 7,000
=Closing Cash Balance 4,000
MCQS
1- Cash flows are grouped in the statement of cash flows into the following major categories:-
(a)-Direct & indirect cash flow (b)-Operating activities, investing activities & financing activities
(c)-Receipt activities & payment activities (d)-Cash & non-cash activiti es

2- There are ------ways of reporting statement of cash flows:-

(a) 3 (b) 4 (c) 5 (d) 2
3- The statement of cash flows is designed to assist users in assessing each of the following except:-
(a)-The ability of company to remain solvent (b)-The major sources of cash receipts during the period
(c)-The reason why net cash flow from operating activity differ from net income (d)-The Company’s profitability

4- Interest on long Term liabilities is ----------------- activity.

Prepared by Syed Khalid Masood cell #03008165123

 9
(a) Operating (b) Financing (c) Investing (d) All of the above

5- Operating activities are also called---------------------activities.

(a) Investing (b) Working Capital (c) Financing (d) None of the above

6- The secondary purpose statement of cash flows is to provide information about------------activities.

(a) Investing (b) Financing (c) Both (a) & (b) (d) None of the above

7- Opening retained earning is Rs.160000, Retained earning at the end of the period Rs.190000,
Profit during the year is Rs.100000. which treatment is correct.
(a) Add Rs.100000 in financing activities (b) Deduct Rs.100000 in financing activities
(c) Add Rs.70000 in financing activities (d) Deduct Rs.70000 in financing activities

8- The primary purpose of preparing a cash flow statement for an entity is to provide information about:
(a)_ Its financial position at the end of an accounting period
(b)_ Its cash receipts and cash payments during an accounting period
(c)_ Its financial position at the start of an accounting period
(d)_ None of the given options

9- Which of the following is example of investing activities?

(a) Furniture purchased (b) Repair furniture (c) Further capital (d) Depreciation furniture

10-How can accuracy of statement of cash flows can be checked?

(a) Opening Cash Balance is answer (b) Net profit before tax is answer
(c) Closing Cash Balance is answer (d) None of the above

ANSWERS MCQS
1-b 2-d 3-d 4-a 5-b 6-c 7-d 8-b 9-a 10-c

ABC COLLEGE & ACADEMY KASUR’S EXCELLENT PERFORMANCE 2009

MBA-I
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc090408457 Syed Khalid Masood 3.80 Kasur college of IT, KASUR
2 mc090410145 M. Inaam 3.72 Kasur college of IT, KASUR
3 mc090407903 Hafiza Nida 3.58 Kasur college of IT, KASUR
4 mc090404007 Qurat Ul Ain 3.56 Kasur college of IT, KASUR
5 mc090409786 Saima Nasreen 3.51 Kasur college of IT, KASUR
6 Mc090406525 Muhammad Usman 3.45 Kasur college of IT, KASUR
7 mc090409762 Aftab Sarwar 3.37 Kasur college of IT, KASUR
8 Mc090404069 Muhammad Zubair 3.36 Kasur college of IT, KASUR
9 Mc090404110 Samina Ameer Din 3.12 Kasur college of IT, KASUR
10 Mc090404111 Ayesha Jabeen 3.09 Kasur college of IT, KASUR

MBA-II
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc090201715 Jawad Ali Razzaq 3.51 Kasur college of IT, KASUR
MBA-III
POSITION ROLL # NAME CGPA VU CAMPUS
1 mc080403976 Shamama Altaf 3.77 Kasur college of IT, KASUR
2 mc080401937 Amna Noreen 3.16 Kasur college of IT, KASUR
3 mc080408335 Mehboob 3.16 Kasur college of IT, KASUR

Prepared by Syed Khalid Masood cell #03008165123