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Question
Reserve for doubtful debts is made out of __________ profit .
Reserve for doubtful debts is made out of __________ profit .
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Solution
The correct option is A revenue
It is quite possible that the whole amount may not be realised in future. However, it is not possible to actually know the amount of such debts. Hence, a reasonable estimate of such loss is made and provided the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded as:Profit and Loss A/c Dr. To Provision for Doubtful Debts A/cIt is shown as a deduction from the debtors on the asset side of the balance sheet. Reserve for doubtful debts is made out of revenue profit.
It is quite possible that the whole amount may not be realised in future. However, it is not possible to actually know the amount of such debts. Hence, a reasonable estimate of such loss is made and provided the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded as:
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
It is shown as a deduction from the debtors on the asset side of the balance sheet. Reserve for doubtful debts is made out of revenue profit.
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