Doubtful debts journal entry is Debit to Bad Debt Expense because the increases the expense account and Credit to Accounts Receivable because decreases the accounts receivable account, removing the uncollectible amount from the records. reflecting the estimated cost of uncollectible accounts Doubtful debts are amounts that a business estimates it may not be able to collect from its debtors. To account for this potential loss, businesses create a provision for doubtful debts. This is an essential part of prudent financial management and helps in presenting a more accurate picture of the business’s financial health.
Key Concepts
- Doubtful Debts: Receivables that are expected to be uncollectible.
- Provision for Doubtful Debts: An allowance created to cover potential future bad debts.
- Bad Debt Expense: The cost recognized in the income statement when creating a provision for doubtful debts.
Journal Entry for Doubtful Debts
When a provision for doubtful debts is created, the following journal entry is made:
Example Scenario: Provision for Doubtful Debts
Assume a business estimates that ₹15,000 of its accounts receivable may not be collected and decides to create a provision for doubtful debts on 31-12-2023.
Step-by-Step Journal Entry
- Record the Provision for Doubtful Debts
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2023 | Bad Debt Expense | 15,000 | Provision for doubtful debts | |
| 31-12-2023 | To Provision for Doubtful Debts | 15,000 | Recognize provision for doubtful debts |
Explanation
- Debit to Bad Debt Expense: This increases the expense account, reflecting the estimated cost of uncollectible accounts.
- Credit to Provision for Doubtful Debts: This increases the liability account, reflecting the obligation recognized for potential bad debts.
Write-Off of Doubtful Debts
If it is confirmed that a particular debt is uncollectible, it is written off against the provision for doubtful debts.
Example: Write-Off of Doubtful Debts
Assume the business decides to write off ₹5,000 of its accounts receivable as uncollectible on 15-01-2024.
Journal Entry to Write-Off Doubtful Debts:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-01-2024 | Provision for Doubtful Debts | 5,000 | Write-off of uncollectible accounts | |
| 15-01-2024 | To Accounts Receivable | 5,000 | Write-off of uncollectible accounts |
Explanation
- Debit to Provision for Doubtful Debts: This decreases the provision account, as the specific doubtful debt is now confirmed and written off.
- Credit to Accounts Receivable: This decreases the accounts receivable account, removing the uncollectible amount from the records.
Conclusion
Recording provisions for doubtful debts ensures that a business accounts for potential future losses and presents a more realistic financial position. Properly managing doubtful debts and their write-offs helps maintain accurate and reliable financial statements.