Adjustments for Provisions for Doubtful Debts (Cambridge International IGCSE Accounting)

Adjustments for provisions for doubtful debts

How do I record the provision for doubtful debts on the financial statements?

• Calculate the provision for doubtful debts at the end of the current year

  • See the revision note Provision for Doubtful Debts for more information

• Calculate the difference between:

  • The provision for doubtful debts at the start of the year

    • This value will be on the trial balance

  • And the provision for doubtful debts at the end of the year

    • This is the value that you need to calculate

• The difference is the value that is stated on the income statement

  • If the provision for doubtful debts increases, the increase is listed with the expenses

    • Label it provision for doubtful debts

  • If the provision for doubtful debts decreases, the decrease is listed with the other income

    • Label it provision for doubtful debts

• Record the new balance for the provision for doubtful debts on the statement of financial position

  • List it underneath trade receivables in the current assets section
  • Subtract the provision from the value for trade receivables

Worked Example Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up a provision for doubtful debts which is to be maintained at 4% of trade receivables.

(a) Prepare an extract from the income statement for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.

(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the income statement for the year ended 31 December 2023.

Answer:

(a)

• Calculate the provision for doubtful debts

4% × $24 000 = $960

• This is an increase from $0

  • It will appear as an expense on the income statement

Final answer: Clara Final answer: Income Statement (extract) for the year ended 31 December 2022
	Final answer: $
Final answer: Expenses
Final answer: Provision for doubtful debts	Final answer: 960

Final answer: Clara Final answer: Statement of Financial Position (extract) at 31 December 2022
Final answer: Current Assets	Final answer: $**	Final answer: **$
Final answer: Trade receivable	Final answer: 24 000
Final answer: Less: provision for doubtful debts	Final answer: 960	Final answer: 23 040

(b)

• Calculate the new provision for doubtful debts

4% × $22 000 = $880

• Calculate the difference from the previous provision for doubtful debts

$960 - $880 = $80

• This is a decrease

  • It will appear as other income on the income statement

Final answer: Clara Final answer: Income Statement (extract) for the year ended 31 December 2023
	Final answer: $
Final answer: Other income
Final answer: Provision for doubtful debts	Final answer: 80