HKAS 37 should be read in the context of its objective, the Preface to Hong Kong Financial Reporting Standards The difference between the treatment of a bad debt and a specific allowance for doubtful debt is that in the latter case, the receivable ledger of the specific debt is not removed in case the debtor actually pays whereas in the case of bad debts, the receivable ledger is reduced to nil. When we are drawing up our final accounts we want to show in the balance sheet as correct a figure as possible of the true value of debtors at a certain date. The allowance for doubtful debts reduces the receivable balance to the amount that the entity prudently estimates to recover in the future. While idea of adjsuting the value of an asset (Trade receivables) downwards is … Bad debts for the current year are to be set off, and an additional amount of provision is to be added. ACCOUNTING STANDARD AASB 137 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Objective The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in The original invoice would have been posted to the debtors control, so the balance on the customers account before the bad debt provision is 500. We do this by estimating how much will not be paid: Allowance for Doubtful Accounts (AFDA) and Bad Debts Expense. Instead, reporting entity is required to carry out impairment review to determine the recoverability of the receivables and any associated allowance. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be uncollectible. Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, … This can involve an additional charge to the bad debt expense account (if the provision appears to initially be too low) or a reduction in the expense (if the provision appears to be too high). Past history of a business may show that a portion of receivable balances is not recovered due to unforeseen circumstances. Such receivables are known as doubtful debts. In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The allowance for doubtful debts is created by forming a credit balance which is deducted from the total receivables balance in the statement of financial position. term ‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Standard. This account is used to reduce the carrying amount of trade receivables in the Statement of Financial Position, if … At the end of the accounting period, the balance in the Bad Debts Account is transferred to the Profit and Loss Account’s debit side, so that the Bad Debts can finally be accounted as a loss. Every year the amount gets changed due to the provision made in the current year. Also, specific allowance may not be created for the entire amount of the doubtful receivable but only a portion of it. Between now and 2020, financial reporting will go through the biggest change this century with the introduction of three new accounting standards, AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases.. The provision for doubtful debts is an accounts receivable contra account, so it should always have a credit balance, and is listed in the balance sheet directly below the accounts receivable line item. Example 1 - Calculation of provision for doubtful debts based on expected credit loss (ECL) ... Revised accounting standards covering revenue, income, leases and financial instruments will impact the financial reporting of Victorian councils in both the 2018-19 … Therefore, it may be prudent to create a general allowance for doubtful debts in addition to the specific allowance. Rather than waiting to see exactly how payments work out, the company will debit a bad debt expense and credit allowance for doubtful accounts. Thus, you will need to adjust the balance in this account over time to bring it into closer alignment with the ongoing best estimate of bad debts. A business typically estimates the amount of bad debt based on historical experience, and charges this amount to expense with a debit to the bad debt expense account (which appears in the income statement) and a credit to the provision for doubtful debts account (which appears in the balance sheet). Put simply, it’s a provision – or allowance – for debts that are considered to be doubtful. The provision for doubtful debts is also known as the provision for bad debts and the allowance for doubtful accounts. This works in the same way as accumulated depreciation is deducted from the fixed asset cost account. It is … Going with the 5% predetermined growth rate is not illegal but raises ethical issues. A provision for doubtful debts of 10% is to be created. E. 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