Content Standard 8.3

Bad Debts, Bad Debts Recovered and Provision for Doubtful Debts

Hutang Lapuk, Hutang Lapuk Terpulih dan Peruntukan Hutang Ragu

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Explanation

Content Standard 8.3 covers three adjustments relating to debtors (Akaun Belum Terima) when financial statements are prepared at the balance date. Bad Debts (Hutang Lapuk) are amounts owed by debtors that can no longer be collected and are written off as a business expense. Bad Debts Recovered (Hutang Lapuk Terpulih) are bad debts previously written off that the debtor later repays, so they are recognised as income (other revenue). The Provision for Doubtful Debts (Peruntukan Hutang Ragu) is an estimate of the amount of receivables that may not be collectible in the future, calculated as a percentage of the net receivables balance.

There are several reasons debts turn bad: the debtor becomes bankrupt or insolvent, dies leaving no estate, absconds and cannot be traced, or the debtor's business is wound up. Because of these risks, the prudence concept (conservatism) requires the business to anticipate possible losses early, while the matching concept requires bad debts and the provision for doubtful debts to be matched against the credit sales revenue of the same accounting period so that net profit is not overstated.

To record Bad Debts, the double entry is Debit Bad Debts and Credit the relevant debtor's account, because the debtor is removed from the records. At the balance date the balance of Bad Debts is transferred to the Income Statement: Debit Profit and Loss (Bad Debts expense) and Credit Bad Debts. Bad debts are reported as an expense in the expenses section of the Income Statement for the year.

For Bad Debts Recovered, when a debtor whose debt was previously written off repays, the short entry is Debit Bank or Cash and Credit Bad Debts Recovered. Some methods first reinstate the debtor's account (Debit Debtors, Credit Bad Debts Recovered) before receiving payment (Debit Bank, Credit Debtors). The balance of Bad Debts Recovered is transferred to the Income Statement as income: Debit Bad Debts Recovered, Credit Profit and Loss, and is reported under revenue or other income.

Provision for Doubtful Debts is computed using the formula: provision percentage multiplied by the Debtors balance after deducting bad debts written off during the year. When the provision is created for the first time: Debit Profit and Loss (Provision for Doubtful Debts expense), Credit Provision for Doubtful Debts. If this year's provision is higher than last year's, only the increase is debited to Profit and Loss and credited to Provision for Doubtful Debts. If this year's provision is lower, the decrease is reversed: Debit Provision for Doubtful Debts, Credit Profit and Loss (recognised as income). In the Statement of Financial Position, Provision for Doubtful Debts is deducted from Debtors under current assets to show the net realisable value of receivables.

Worked examples

Writing off a bad debt and transferring to the Income Statement

Perniagaan Perabot Sri Wangi finds that its debtor, Encik Rahim, has become bankrupt owing RM800 that can no longer be collected. The write-off entry is: Debit Bad Debts RM800; Credit Debtors (Encik Rahim) RM800.

At the balance date of 31 December, the Bad Debts balance is transferred to the Income Statement: Debit Profit and Loss RM800; Credit Bad Debts RM800. This RM800 is reported as an expense in the Income Statement for the year ended 31 December.

Bad debts recovered

In the following year Encik Rahim repays the RM800 that had been written off. Using the direct method, the entry is: Debit Bank RM800; Credit Bad Debts Recovered RM800.

At the balance date the balance is transferred to the Income Statement as income: Debit Bad Debts Recovered RM800; Credit Profit and Loss RM800. This amount is reported as income or other revenue, not as a reduction of expense.

Creating and adjusting the provision for doubtful debts

On 31 December 2024, Perniagaan Sri Wangi has a Debtors balance of RM50,000 and RM2,000 of bad debts were written off during the year. The provision is set at 5% of net receivables. Net receivables = RM50,000 less RM2,000 = RM48,000. Provision = 5% x RM48,000 = RM2,400.

First-time creation: Debit Profit and Loss RM2,400; Credit Provision for Doubtful Debts RM2,400. In the Statement of Financial Position: Debtors RM48,000 less Provision for Doubtful Debts RM2,400 = RM45,600.

On 31 December 2025, net receivables are RM60,000. The new provision = 5% x RM60,000 = RM3,000. Because this is an increase of RM600 (RM3,000 less RM2,400), the entry is: Debit Profit and Loss RM600; Credit Provision for Doubtful Debts RM600. Only the increase is charged as an expense for the year.

Practice

Perniagaan Aneka Jaya writes off a bad debt of RM1,500 owed by Puan Lily who is bankrupt. State the double entry for the write-off and the transfer entry to the Income Statement at the balance date.

Answer: Write-off entry: Debit Bad Debts RM1,500; Credit Debtors (Puan Lily) RM1,500. Transfer entry at balance date: Debit Profit and Loss RM1,500; Credit Bad Debts RM1,500. Bad Debts of RM1,500 are reported as an expense in the Income Statement.

On 30 June 2025 the Debtors balance of Perniagaan Bestari is RM82,000 and RM2,000 of bad debts were written off during the year. The provision for doubtful debts is set at 3%. Calculate the provision and show its presentation in the Statement of Financial Position.

Answer: Net receivables = RM82,000 less RM2,000 = RM80,000. Provision for Doubtful Debts = 3% x RM80,000 = RM2,400. In the Statement of Financial Position under current assets: Debtors RM80,000 less Provision for Doubtful Debts RM2,400 = RM77,600. If this is a first-time creation, the entry is: Debit Profit and Loss RM2,400; Credit Provision for Doubtful Debts RM2,400.

Perniagaan Ceria's provision for doubtful debts at the start of the year is RM3,000. At year end, net receivables are RM40,000 and the provision is maintained at 5%. Determine the required adjustment and the double entry.

Answer: New provision = 5% x RM40,000 = RM2,000. The old provision of RM3,000 is higher, so there is a decrease of RM1,000 (RM3,000 less RM2,000). The decrease is reversed as income: Debit Provision for Doubtful Debts RM1,000; Credit Profit and Loss RM1,000. The provision shown in the Statement of Financial Position is RM2,000, deducted from Debtors RM40,000 to give RM38,000.

Encik Danish, a debtor whose RM600 debt was written off last year, suddenly pays in full through the bank. Explain how to record this and its effect on the Income Statement.

Answer: Using the direct method: Debit Bank RM600; Credit Bad Debts Recovered RM600. At the balance date, transfer to the Income Statement: Debit Bad Debts Recovered RM600; Credit Profit and Loss RM600. As a result, RM600 is reported as income (other revenue) in the Income Statement and increases the net profit for the year.

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Key terms

Bad Debts (Hutang Lapuk): A debtor's debt that can no longer be collected and is written off as an expense.
Bad Debts Recovered (Hutang Lapuk Terpulih): A bad debt previously written off but later repaid, recognised as income.
Provision for Doubtful Debts (Peruntukan Hutang Ragu): An estimate of receivables that may be uncollectible, based on a percentage of net receivables.
Net receivables (Penghutang bersih): The Debtors balance after deducting bad debts, used as the base for calculating the provision for doubtful debts.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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