Adjustment of Bad Debts in Final Accounts (Financial Statements)

Every business makes cash and credit transactions in its day-to-day life. When the goods are sold on credit to any person or firm, we record them as debtors in books of account, and this shows that some amount is recoverable from them in the near future. When the business is unable to recover its payment for the goods given, bad debts take place, and this is a loss for the business, which is recorded in Trading and Profit & Loss A/c.

Adjustment:

The following treatment takes place in respect of Bad Debts:

A. If Bad Debts are given outside the trial balance:

In such a case, two effects will take place:

• First, bad debts will be shown in the Dr. side of the Profit & Loss A/c, being a loss for the business.
• Second, the amount of debtors appearing in the Balance Sheet would be reduced by the amount of bad debts.

B. If Bad Debts are given Inside the trial balance:

In such a case, these will be shown only on the Dr. side of the Profit & Loss A/c.

Illustration:

The following adjustments were noted :

1. Further Bad Debts amounting to ₹2,000 and Provision to be created at 5% of debtors.

2. The value of Plant and Machinery is appreciated by 10%.

3. Depreciation on the building is charged at 12.5%.

Solution: