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Assets > Assets - Pg. 86

accounts demystified Trade debtors and doubtful debts Accounting for debtors is simple. We saw how to do it when we looked at SBL. The only thing you have to consider is the effect of bad debts or doubtful debts. If: you know that one of your customers has gone bust owing you money which they will not be able to pay, or have reason to believe that one of your customers is likely to you go bust and not be able to pay you, then you should make an allowance for those non-payments. If you know for certain that you will not get paid, then you write off the debt. If you only think you might not get paid, then you make a provision against the debt. Whether you are writing off a debt or just making a provision, the accounting is the same: Decrease Debtors Decrease Retained profit What if you make a provision against a debt that you think may not be paid, but subsequently it is? You have to reverse the transaction. Effectively, it will show up as an additional profit in your next set of accounts: Increase Cash Increase Retained profit Prepayments/other debtors Again, the accounting treatment is identical to that which we used when constructing SBL's balance sheet. 86