A Sole Trader has a number of debtors.The total amount in the Sales Ledger at the end of the financial year is £5,600.However,it is discovered that one debtor who owes £400 has just been declared bankrupt.Past experience shows that approximately 2% of debts are never repaid,and therefore a provision equal to 2% of closing debtors is required.There is currently a provision of £80.Which of the following is the correct adjustment for the provision for bad debts?

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Quizplus · Accepted Answer

There are actually TWO adjustments here. Firstly, there is a known bad debt of £400. This must be written off: Dr Bad Debt £400 as an expense to the business, reducing profit by £400 Cr Debtors (remove the amount owning to us, as we know we will never receive it), reducing the current assets by £400/ Secondly, we need to make sure we have the correct provision. Debtors are now £5,200. (£5,600 - £400). We need a provision worth 2% of this = £104. There is already a provision of £80, and so we only need to increase it by £24. Dr Increase to Provision for bad Debts as an expense in the Income Statement Cr "Provision for bad debts" as shown on the Statement of Financial Position.

A Sole Trader Has a Number of Debtors