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Bad debts and provisions for doubtful debts are among the most frequently tested adjustments in ICAP FOA papers. They appear in MCQs, in Financial Statements adjustments, and as standalone ledger account questions. Students who understand the distinction between writing off a bad debt and creating a provision will consistently pick up marks that others drop.
What Is a Bad Debt?
A bad debt arises when a business determines that a specific customer will definitely not pay what they owe. The amount is irrecoverable and must be removed from the books entirely.
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Journal Entry to Write Off a Bad Debt
Dr Bad Debt Expense (SOCI) xxx
Cr Trade Receivables (SOFP) xxx
The effect: the trade receivables balance decreases, and the bad debt expense reduces profit in the SOCI. This is a permanent write-off — the debt is gone.
Bad debts written off in ICAP trial balance questions often appear as a note: 'A debt of Rs. 5,000 owed by customer X is to be written off.' This means reduce receivables and charge bad debt expense.
What Is a Provision for Doubtful Debts?
A provision for doubtful debts (also called allowance for receivables) is an estimate of the portion of trade receivables that may not be collected, even though no specific debt has yet been identified as irrecoverable.
This follows the prudence concept — potential losses are recognised as soon as they are probable, even before they are certain.
How the Provision Works
The provision is typically calculated as a percentage of closing trade receivables — for example, 2% of outstanding debtors at year end.
Provision required = Trade Receivables × Provision %
Creating, Increasing, and Decreasing the Provision
Year 1 — Creating the Provision for the First Time
Dr Bad Debt Expense / Provision Expense xxx
Cr Provision for Doubtful Debts (SOFP) xxx
The full provision amount is charged to the SOCI in Year 1.
Year 2 — Provision Needs to Increase
Only the INCREASE (top-up) is charged to the SOCI — not the full new provision amount.
Dr Bad Debt Expense (increase only)
Cr Provision for Doubtful Debts (increase only)
Year 2 — Provision Needs to Decrease
The decrease is released back to the SOCI as income (reduces the expense).
Dr Provision for Doubtful Debts (decrease only)
Cr Bad Debt Expense / Income (decrease only)
The most common ICAP exam trap: students charge the full new provision each year instead of only the movement. If last year's provision was Rs. 4,000 and this year's required provision is Rs. 6,000 — only Rs. 2,000 is charged to SOCI, not Rs. 6,000.
Presentation in the Financial Statements
SOCI Impact
- Bad debts written off — charged as an expense
- Increase in provision — charged as an expense
- Decrease in provision — shown as a reduction in expenses or other income
SOFP Impact
Trade receivables are shown NET of the provision:
Trade Receivables (gross) xx,xxx
Less: Provision for Doubtful Debts (x,xxx)
Net Trade Receivables xx,xxx
Worked Example
A business has trade receivables of Rs. 80,000 at year end. Bad debts of Rs. 3,000 are to be written off. A provision of 5% is to be maintained on remaining receivables. Last year's provision was Rs. 4,200.
- Receivables after write-off: 80,000 − 3,000 = Rs. 77,000
- Required provision: 5% × 77,000 = Rs. 3,850
- Last year's provision: Rs. 4,200
- Movement: 3,850 − 4,200 = −Rs. 350 (decrease — release to SOCI as income)
- SOCI charge: Bad debt Rs. 3,000 expense; Provision release Rs. 350 income
- SOFP: Receivables Rs. 77,000 − Provision Rs. 3,850 = Net Rs. 73,150
Bad Debt Recovered
Occasionally a debt that was previously written off is subsequently paid by the customer. This requires two entries:
Step 1 — Reverse the original write-off:
Dr Trade Receivables xxx
Cr Bad Debt Recovered xxx
Step 2 — Record the cash receipt:
Dr Cash / Bank xxx
Cr Trade Receivables xxx
The bad debt recovered amount appears in the SOCI as income, offsetting the original expense.
Practice Bad Debts on Preptio
Bad debts and provisions appear in nearly every ICAP FOA Financial Statements case on Preptio — embedded as trial balance adjustment notes. Drilling these on Preptio's platform gives you instant feedback on whether your provision movement calculation and journal entries are correct.
Practice Bad Debts & Provisions on Preptio → preptio.com
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