Dear All

We are a firm working in the domain of brokerage.

We have made provisions by the end of the last year for few customers (let’s say 10,000 USD).

For one of them the provisions was 2,000 USD. Now we have settled the case and the final loss is 3,500 USD (So 1,500 USD of additional loss not provided).

During the year for the other customers the expected loss is coming less (Lets say 4,000 USD instead of 8,000 USD), nothing is booked (as profit) waiting for the end of the year to get the final situation.

For the settled case our accountant has booked:

Dr- Provision for bad debts 3,500 USD To
Cr - Customer Account 3,500 USD.

I think that this is wrong, because in respect of the principle of non-compensation normally we must book the following:

Dr- Provision for bad debts 2,000 USD
Dr- Losses/Bad Debt (Expenses Acc) 1,500 USD

Cr- Customer Account 3,500 USD
.

Please give me your opinions.

Best Regards

First off, are these litagation suits? If so then the loss should be accrued and booked at the lower of the probable amount. If the litagation is possible then no accrual is needed and a footnote disclosure would suffice. It's hard to understand the order of your verbiage so I just wanted to throw that out there.

For the first case you should have booked against the provision you set up for $2,000 and take the remaining loss as some period expense.

After reading this a little more it sounds like you are describing A/R disputes. In that case, you just need to book a provision for the estimate loss in the year under question. The first JE doesn't make sense with what you said previously. I would expect it to look like this:

Initial Entry to book provision:

Bad Debt         &a mp;n bsp;        2,000

              Allowance for doubtful acct.              2,000

To book actual loss:

Allowance for doubtful account  2,000

Bad Debt         &a mp;n bsp;           1,500

           Customer A/R Account                          3,500

Your G/L accounts are all screwy. In your entry you're crediting an expense? Expenses are debited. Not sure why you would increase customers account if you anticipate losses. Hence you wouldn't but you are debiting them. Unless i'm missing some major part of the picture here. In addition, why do you say nothing is booked as profit? All of these balances would be included in revenue and be included in your overall margins hence that are on your income statement and included the calculation of profit. I must be missing something, this all sounds crazy...

Thx for your reply

I'm sorry for the confusion, i've inverted the booking.

To Correct, by 31-12-2008 we've booked

Dr - Bad Debts (Exp Acc) 10,000

Cr - Prov for bad debts 10,000

This year when the case of the said customer was settled the accountant has booked:

Dr- Provision for bad debts 3,500 USD To
Cr - Customer Account 3,500 USD.

(This will hide the 1,500 USD of supplementary loss based on the fact that for the other provided customers the expected loss is less than what was provided at 31-12-2008 and that we have an excess of provision [Now the expected loss is only 4,000 and we have as provision 8,000])

I think that normally we must book the settlement as follow:

Dr- Provision for bad debts 2,000 USD
Dr- Losses/Bad Debt (Expenses Acc) 1,500 USD

Cr- Customer Account 3,500 USD

and adjust the provision by the end of the year.

Hope that now there's no confusion.

Regards