Question

D's Trial Balance contains the following information: Discount allowed Rs. 500, Provisions for discount on debtors Rs. 1,100. It is desired to make a provision for discount on debtors of Rs. 1,800 at the end of the year. The amount to be debited to the Profit & Loss Account is:

• A. Rs. 1,200
• B. Rs. 3,200
• C. Rs. 700
• D. Rs. 2,200

Answer 1

The correct option is A Rs. 1,200

Discount allowed is the incentive to the debtors for early payments, cash discount is also allowed on sales, this discount is an expense for the business and is debited to the profit and loss account. Provision for debtors is the estimated bad debt that may arise in the future. It is a deduction to the current year's profit and is so debited to the profit and loss account.

Discount allowed and provision for debtors being a charge against profit is debited to the profit and loss account.

The entry for the transaction will be -

Profit and loss A/c Dr 1200

To Discount Allowed A/c 500

To Provision for debtors A/c 700.

Since there was already a provision of 1100, after deducting 500 discount provision left is of Rs. 600. we will add 1200 more to make it total of 1800.