Question

1/. Provide a detail description of what is doubtful debt and how to identify it, and detail descriptions as to what are the procedure to deal with it when it is identified including resolving with the customer and entries to the journals and ledger and accounts. (100 words)

2/. Provide a detail description of what is bad debts and how to identify it, and detail descriptions as to what are the procedure to deal with it when it is identified including resolving with the customer and entries to the journals and ledger and accounts. (100 words)

Answer 1

Doubtful debts:

The doubtful debts are the accounts receivable balance which might become irrecoverable at some point of time in future. It may not be possible to identify which open invoice of which customer is specifically going to be irrecoverable in future, thus reserve or allowance account is created. This is a contra entry. Journal entry for allowance is

Bad Debts a/c Dr.

Allowance for Doubtful debts a/c Cr.

Allowance for doubtful debts appear just below the Accounts receivable in balance sheet with a credit balance. There are various method to estimate allowance for doubtful debts:

1.Percentage of sales method

2.Percentage of accounts receivable method

3.Aging of accounts receivable method

Bad debts:

Bad debts is the amount of accounts receivable that is identified as uncollectible. If the customer is bankrupt or in financial problem and it is clear that amount is irrecoverable, the company treats it as bad debts. Once it is identified that which amount/invoice is uncollectible, credit memo is issued to the customer and matched against the invoice which is uncollectible. If allowance for doubtful debts is provided earlier than Journal entry for bad debts will be:

Allowance for doubtful debts a/c dr.

Accounts receivable a/c Cr.

If allowance is not provided earlier than Journal entry will be:

Bad debts a/c Dr.

Accounts receivable a/c Cr.

This method is known as direct write off method