Non-current Assets
Provision for Doubtful Debts
Questions test your ability to create and adjust a provision for doubtful debts, record the movement through the income statement, and show the net trade receivables figure correctly in the statement of financial position.
Only the change in provision goes to the income statement — not the full provision amount. An increase is an expense; a decrease is income. In the SFP, deduct the full provision from trade receivables to show the net figure. Common mistake: charging the full provision as an expense every year.
Key Concepts to Revise
Creating the Provision
First year: full provision is an expense. Debit income statement, credit provision for doubtful debts account.
Increasing the Provision
Only the increase is charged to the income statement as an expense. The provision account balance grows.
Decreasing the Provision
The reduction is credited to the income statement as income (reduces expenses). The provision account balance falls.
SFP Presentation
Show trade receivables minus provision for doubtful debts to arrive at the net realisable value of receivables.