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Provision for bad debts level 3?

  • Fellow
  • 86 posts
  • # 80200

Hey!


I hope someone can help.


I studied for level 1 & 2 manual through a training provider, have passed those and am now on to level 3.

I have decided to go it alone for level 3 and am studying through the Kaplan advanced bookkeeping book and looking at other books for references as well.


The Kaplan book doesn't cover bad debt provision at all which is part of the syllabus, it is mentioned in the beginner advanced book though, I looked at a book simple called 'Business Accounting' in the library and it said when accounting for bad debt provision each year, rather than add a percentage of your debtors to the provision each year, you would calculate the provision for that year and either debit or credit the difference to the privsion (ie if the debtors total is reduced you reduce the balance on the provision, if it's increased then you increase the difference)


Does this sound correct to you? Or do you add the full amount of the provision each year to the account so that the total builds up?


Would either way be ok in line with the level 3 manual exam? I'm going to study both ways of the provision but i'm not sure which way is more exam appropriate?!


Many thanks!!! xxx                   
  • Fellow
  • 86 posts
  • # 80307

No response? :(
kjmcculloch
  • 1159 posts
  • # 80310

Thats right.  If you have a debtors figure in year 1 of £1000 and the provision for bad debts is 10% you would show it as an expense in the P&L.  You would expense £100 in year one and the provision for bad debts on the balance sheet would sit at £100, shown removed from the total debtors figure.

Then in year 2 if the debtors figure is still £1000 and provision for bad debts remains at 10% the £100 is only shown in the balance sheet.

In year 3 the debotrs figure increases to £2000 and the provision remains at 10%.  £100 needs to be added.  This is shown as an expense of £100 (just the increase) in the P&L and a provision figure in the balance sheet for £200.

If then in year 4 the debtors figure remains at £2000 but the provision drops to 5% then £100 is shown as a negative expense in the P&L and the balance sheet figure is shown as £100.

Hope I've explained this well.

Kris

 
  • Fellow
  • 64 posts
  • # 80324

You should have been a teacher Kris, a perfect educational reply with worked examples, that topic confuses a lot of students, it is only the increase or decrease in provision showing in the P&L, although actual bad debt write off if any should also be shown

Edited at 01 Mar 2012 11:34 PM GMT
Trippy
  • Fellow
  • Practice Licence
  • 109 posts
  • # 80326

Good Luck Kara, THat is what I did. Good clear answersabove  to the question.

Yes Kaplan doesn't go it into great detail but It mentions it in passing in Chapter 8 example on p123 and one of the question  12 in the kit has it on page 19.

Just shout if there are other questions 9 or confirm just when you think you are going around in circles Tongue Out

Clare
  • Fellow
  • 86 posts
  • # 80359

Thank you so much for your help :) 
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