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

Revision Note

Author

Donna Simpson

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Accounting Content Creator

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

Part (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

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

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

Part (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

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

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