Trade Receivables — full notes

Trade Receivables

1. Two different problems, two different mechanics

• Bad debts written off - a specific customer's debt is confirmed irrecoverable. That specific amount is removed from receivables entirely.
• Provision for doubtful debts - at year end, a business cannot know exactly which remaining customers will not pay. Prudence says estimate it anyway. This does not remove any specific balance - it reduces the total receivables figure shown by an estimated amount.

2. Writing off a bad debt

Bad debts expense = the specific amount written off
Trade receivables (after write-off) = Trade receivables (before) - amount written off

3. Provision for doubtful debts

Usually estimated as a percentage of receivables remaining after write-offs.

Provision required = Receivables (after write-offs) x estimated %

The movement in the provision from last year to this year hits the Income Statement - not the whole balance each year:

Increase in provision -> charged as an expense
Decrease in provision -> credited (reduces expense, or shown as income)

4. Worked example

Trade receivables stand at KES 632,000 before any write-offs. A specific debt of KES 12,000 is written off. The business estimates 5% of what remains will not be collected. Last year's provision was KES 20,000.

Step 1 - Write off the bad debt: 632,000 - 12,000 = KES 620,000

Step 2 - New provision: 620,000 x 5% = KES 31,000

Step 3 - Movement: 31,000 - 20,000 = KES 11,000 increase

Step 4 - Net receivables for SOFP: 620,000 - 31,000 = KES 589,000

Total charge to the Income Statement: the bad debt written off (12,000) plus the increase in provision (11,000) = KES 23,000.