How is Bad debt accounted in the Balance Sheet?

[bullboy8]

My understanding is that bad debt is charged as an expense in the income statement and also remove the amount of bad debt from the asset side of the balance sheet.

if net assets = equity, then if asset is lower due to bad debt, then equity must reduce to balance the balance sheet. But, what is deducted in the equity side?

Thanks

oh...is write downs treated the same way or does it only affect the balance sheet (asset side)?

 

[arabianights]

I'm no accountant but I would have thought it would be capital.

 

[Crap Buddist]

If I remember correctly, both a provision for bad debts and bad debts written off accounts will be summed in the expense section of the P n L accounts. redcucing net profits.

So the trinity will be..

Assets reduced (reduction of debtors,money owed 2 the biz, that money(source) aint coming)
liability increased

capital + or - as a result of net profits retained. financed by....opening cap ,cap in, divi's out to owners etc..

Also with the accounting standards, i think prudence dictates as soon as a whiff of any need for increase (or decrease) for provisions or bad debts is known, they have to declare it (charge it). AND NOT spring any nasty surprises...


think i'm right on the basics...

 

[bullboy8]

how does liability increase? I think ive figured it out....bad debt/write down is both charged as expense and also the balance sheet will refect a lower asset valuation....

thus, net asset will equal equity.......so u need to be increase your liability because this has already been accounted for in the profit or loss which is brought into the balance sheet as loss or profit.

 

[Crap Buddist]

yeah they should credit the debtors account and then debit say provisions for bad debts. thats the double entry, debit and credit.


debit/ credit...... year end the debtors will be reduced because of the charge for bad debts and liability increased because the business (seperate entity has to account for that reduction/charge hence shown in nominal account, I think)...

Overall this accounting stroke will result in (this case) reduction in net profits which will effect the capital accounts, including added /retained profits to shareholders funds.

Maybe a qualified accountant lurking can pin it technically 100% but I dont think we are too far off the mark....


yeah but the reduction is still coming off reduction in net profits, which will appear in the calculations of the capital account.



Got a few Frank Woods books in the loft but buggered if I'm hooking them out...

 

[Effkay]

Hey guys,

What you do is, credit bad debt provision (creating a liability to offset your asset) and debit your expense account, thus taking the hit to P&L.

If the bad debt is to be written off completely, you then credit the asset and debit the bad debt provision to remove it from the balance sheet.

Make sense?

 

[msrxlbp2]

I fbad debt is written off iot is expensed to the PnL and the Debtors (Asset) is reduced by the same amount.

Simple

 

[Effkay]

Yes that is true,

But if it is only a provision, then a liability is created and the asset face value is not reduced.

 

[donbright]

My understanding is that bad debt is charged as an expense in the income statement and also remove the amount of bad debt from the asset side of the balance sheet.

if net assets = equity, then if asset is lower due to bad debt, then equity must reduce to balance the balance sheet. But, what is deducted in the equity side?

Thanks

oh...is write downs treated the same way or does it only affect the balance sheet (asset side)?

Since a bad debt comes from a "good" debt, it would simply reduce the amount of accounts receivable from the asset side of the balance sheet.

Don

 

[niisolo]

please help me answer this question

(b) ABC Bank Balance Sheet as at Dec. 2012
Assets: GHC.(million)
Cash 10
Short-term securities 20
Loans and advances 140
Fixed assets 10
Total Assets 180
Liabilities and Equity GhC (million)
Deposits 90
Long-term debts 10
Capital 50
Retained earnings 30
Total Liabilities and Equity 180
a. (i) On 30 September 2008, ABC Bank incurred losses totaling GhC30 million as a result of bad debts. Show how this will affect the bank’s balance sheet
(ii) Show whether bank will continue to be in operation or not.
b. (i) What would have happened to ABC Bank’s balance sheet if it had incurred bad debt losses totaling GhC110 million on Dec. 2012?
(ii) Show whether bank will continue to be in operation or not.