Steps to record a doubtful debt allowance or provision
- Calculate the allowance for doubtful debts that should be made at the accounting period-end (i.e. the total of the specific and general doubtful debts)
- Post a journal
- The journal should ensure that the balance of the Allowance for Doubtful Debts Account equals the figure calculated in step 1. Note that this will be a credit if the allowance is being increased and will be a debit if the allowance is being reduced
- The corresponding debit or credit will be posted to the Allowance for Doubtful Debts Account (or alternatively the Irrecoverable Debts Account)
Illustration: year 1
Thomas started trading on 1st September 2018. On 31st August 2019, he was owed £12,500 by his customers but Thomas believed that £500 was unlikely to be received and a doubtful debt allowance for this amount was required.
As there was no balance on the Allowance for Doubtful Debts Account it must be increased by £500. This is achieved by posting the following journal:
The journal would then be posted to the General Ledger accounts as shown below (the postings are shown in blue). Note that no entries are made in the Sales Ledger Control account as no amounts are actually being written-off as irrecoverable.
The accounts can then be closed down. The balancing figure on the Allowance for Doubtful Debts Account will be carried down to the start of the next period (as this is a negative asset account) whilst the balancing figure on the Allowance for Doubtful Debts Adjustment Account will be moved to the Profit & Loss account (as this is an expense account).
Illustration: year 2
On 31st August 2019, that is the end of his second year of trading, Thomas is owed £9,600 by his customers but he believes that £400 of this is unlikely to be received.
At the start of the second year, the balance on the Allowance for Doubtful Debts account is £500
At the end of the second year, the balance needs to be reduced by £100 to £400. This is achieved by posting the journal below.
The postings in the General Ledger accounts are shown below in blue.
The accounts can then be closed down at the end of the second year.
Note that the amount sent to the Profit & Loss account from the Allowance for Doubtful Debts Adjustment account in the first year is on the different sides of the account from the second year. This is because the allowance for doubtful debts was being increased in the first year and being reduced in the second. In both years, however, the balance carried down on the Allowance for Doubtful Debts account is recorded on the debit side.
