What is Doubtful Debts?


Uncollectible debts

When businesses sell on credit they expect customers will pay.  However, there is always a risk of default inherent in credit extension.  Some customers may not settle their accounts or part of their accounts.  Management of debtors therefore, must take account of the possibility of debts becoming uncollectible. There are two types of uncollectible debts; doubtful and bad debts.


Doubtful Debts
These are debts or part of debts which are overdue, settlement of which is considered doubtful.  While non-collection is certain in bad debts, it is not certain in doubtful debts. Doubtful debts are therefore, not written off directly lest all effort at collection cease. They are however, recognized in books of accounts as doubtful accounts. This is accordance to the prudence concept.

Recognition of doubtful debts is made through a charge against profits through a doubtful debts expense account. The double entry for such a charge is not made directly to the debtors account. Instead a contra asset account known as "Provision for Doubtful Debts" account is set up and credited.  This leaves the debtors account and subsidiary ledgers unchanged.

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