ACCOUNTING FOR ASSET -DEBTOR

1. ACCOUNTING FOR ASSET-DEBTOR

2. 1. Current Asset: Debtors Definition: • A debtor is people who have an obligation to pay a debt to the business from the activities of buying stock • 2 types of debtors: i.Trade Debtors- debtors from sales of stock ii. Debtors – from sales of assets.

3. 1. Current Asset: Debtors Credit Control: i. Credit approval - approve the credit only to the appropriate customer ii. Recording – record a complete credit amount in the individual debtors account, before posting to debtors control account and make a frequent checking. iii.Credit policy – the credit policy must be determined before hand in the credit policy to the debtors.

4. 1. Current Asset: Debtors Debtors Credit Limit Total Debt Current Period 30 days 60 days >60 days Ali 5,000 3,000 1,000 1,000 1,000 Ahmed 6000 4,000 2,500 1,500 Abu 4000 3,000 1,500 1,000 500 • How to measure the collection of debtors account? • This can be done using the ageing report. • Refer to the ageing schedule, most probably Abu • cannot settle their debt.

5. Accounting for Bad Debt Expense • Allowance method • Direct write-off method.

6. Methods of Estimating Doubtful Debts when using the Allowance method • Percentage of sales – Estimated for expense is based on some measure sales • Percentage of Receivables – Estimate for expense is based on ending accounts debtor and the existing balanc in the allowance account.

7. Dr Bad Debt Expenses Cr Allowance for Doubtful Debts • Allowance for Doubtful Debt: • What is the difference between the bad debt and allowance for doubtful debt? • - Bad debt is a debt that cannot be collected within the accounting • period. • Allowance for doubtful debt is an expected debt that cannot be • collected within accounting period. • Comply with the concept of: • i. Matching • ii. Prudence • The journal entry to record bad debts expenses:

8. Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses: • Example 1: (No Allowance on doubtful debts account:) • The information below is about Ainun Enterprise for the year ended 31/12/08. • Debtor (before bad debt written off) RM 80,000 • Bad Debts written off RM 2,200

9. Dr Cr Bad Debt Expenses 2,200 Debtors 2,200 (being a bad debts written off) Income Statement 2200 Bad Debt Expenses 2200 (posting to Income Statement) Bal b/d 80,000 Bad debts exp. 2,200 Debtors 2,200 Inc. Statement . 2,200 Bal. c/d 77,800 80,000 80,000 2,200 2,200 • Journal Entry: • Debtors’ a/cBad debts expenses

10. Operation Expenses : Bad debts 2,200 Current Asset Debtors 77,800 (-) Allow for d/d ( 0) 77,800 • Presentation in Income Statement: • Income Statement for the year ended … • Presentation in Balance Sheet: • Balance Sheet as at ….

11. Using the Allowance for BD & DD to write-off Bad Debts Expenses: • ` • Example 2: (No bad debts written off and Allowance for BD & doubtful debts is created): • The information below is about Ainun Enterprise for the year ended 31/12/08. • Debtor (before bad debt written off) RM 80,000 • Ainun expected that uncollectible debt is 3% from the debtors balance. • Workings: • Allowance for Bad Debt & Doubtful debt on 31/12/2008 • 80,000 x 3% = RM 2,400

12. Dr Cr Bad Debt Expenses 2,400 Allowance for BD & DD 2,400 (being an allowance for d/d for the year) Bal c/d 2,400 Bad debts exp. 2,400 All d/d 2,400 IS 2,400 2,400 2,400 • Journal Entry: • Allowance for BD & DD a/c • Bad debts expenses a/c

13. Operation Expenses : Bad debts 2,400 Current Asset Debtors 80,000 (-) Allow. for d/d ( 2,400) 77,600 • Presentation in Income Statement: • Income Statement • Presentation in Balance Sheet: • Balance Sheet as at….

14. Using the Allowance for BD & DD to write-off Bad Debts Expenses: • Example 3: (Decrease in Allowance for BD & DD): • The information below is about Ainun Enterprise for the year ended 31/12/08. • Debtor (before bad debt written off) RM 80,000 • Bad debts written off RM 2,200 • Allowance For doubtful debt (1/1/08) RM 2,500 • Ainun expected that un-collectible debts is 2% from the debtors balance • Workings: • Provision for doubtful debt on 31/12/2008 • (80,000 – 2,200) x 2% = RM 1,556

15. Dr Cr Allowance for BD & DD 2,200 Debtors 2,200 (being a bad debts written off) Bad debts expenses 1,256 Allowance for BD & DD 1,256 (being a decrease in allowance for doubtful debt) • Journal Entry:

16. Debtors 2,200 Balance b/d 2,500 Balance c/d 1,556 Bad debts expenses 1,256 3,756 3,756 All. For BD DD 1,256 Income Stat. 1,256 Bal b/d 80,000 All for BD &DD 2,200 Bal. c/d 77,800 80,000 80,000 • Allowance for BD & DD a/c • Bad debts expenses a/c • Debtor a/c

17. Operation Expenses : Bad debts 1,256 Current Asset Debtors 77,800 (-) All for BD & DD ( 1,556) 76,244 • Presentation in Income Statement: • Income Statement • Presentation in Balance Sheet: • Balance sheet as at

18. Using the Allowance for Doubtful Debt to write-off Bad Debts Expenses: • Example 4: (Increase in Allowance for BD & DD): • The information below is about Ainun Enterprise for the year ended 31/12/08. • Debtor (before bad debt written off) RM 80,000 • Bad debts written off RM 2,200 • Allowance for BD & DD (1/1/08) RM 2,000 • Ainun expected that uncollectible debts is 5% from the debtors balance • Workings: • Allowance for BD & DD on 31/12/2008 • (80,000 – 2,200) x 5% = RM 3,890

19. Dr Cr Allowance for doubtful debt 2,000 Bad Debt Expenses 200 Debtors 2,200 (being a bad debts written off) Bad debts expenses 3,890 Allowance for doubtful debt 3,890 (Being an increased in the Allowance for BD & DD a/c) • Journal Entry:

20. Debtors 2,000 Balance b/d 2,000 Balance c/d 3,890 Bad debts expenses 3,890 5,890 5,890 Debtors 200 Income Stat. 4,090 All for BD & DD 3,890 4,090 4,090 Bal b/d 80,000 All for BD & DD 2,000 Bad debts exp. 200 Bal. c/d 77,800 80,000 80,000 • Allowance for BD & DD a/c • Bad debts expenses a/c • Debtors’ a/c

21. Operation Expenses : Bad debts 4,090 Current Asset Debtors 77,800 (-) All for BD & DD ( 3,890) 73,910 • Presentation in Income Statement: • Income Statement • Presentation in Balance Sheet: • Balance sheet as at

22. Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses: • Example 5: (Bad debt over Provision): • The information below is about Ainun Enterprise for the year ended 31/12/08. • Debtor (before bad debt written off) RM 80,000 • Bad debts written off RM 800 • Allowance For BD & DD (1/1/08) RM 1,650 • Ainun expected that un-collectible debts is 1% from the debtors balance • Workings: • Allowance for BD & DD on 31/12/2008 • (80,000 – 800) x 1% = RM 792

23. Dr Cr Allowance for BD & DD 800 Debtors 800 (being a bad debts written off) Allowance for BD & DD 58 Bad debts over provision 58 (Being a bad debt over provision) • Journal Entry:

24. Debtors 800 Balance b/d 1,650 Bad debt over prov. 58 Balance c/d 792 1,650 1,650 Income Stat. 58 All for BD & DD 58 Bal b/d 80,000 All for BD & DD 800 Bal. c/d 79,200 80,000 80,000 • Allowance for BD & DD a/c • Bad debts over provision a/c • Debtors’ a/c

25. Other Income: Bad debts over provision 58 Current Asset Debtors 79,200 (-) Allowance for BD & DD ( 792) 78,408 • Presentation in Income Statement: • Income Statement • Presentation in Balance Sheet: • Balance sheet as at….

26. Bad Debt Recovered • debt that are considered bad are paid back by customer (debtors) for the full amount or half of the amount • Example : • On 15/6/2008, one of the customers names Ali had • paid back their debt for an amount of RM2,000

27. Journal Entry: Dr Cr Bank 2,000 Ali a/c 2,000 (being a cash received for customers bad debt) Ali a/c 2,000 Bad debt recoverable 2,000 (being a bad debts recoverable) OR Bank 2,000 Bad debts recoverable 2,000 (Being a bad debt recoverable)