What are the 'provisions'? How are they created? Give accounting treatment in case of provision for doubtful debts.
What are the 'provisions'? How are they created? Give accounting treatment in case of provision for doubtful debts.
The actual amount of expenses or losses for the current accounting period cannot be determined with certainty as they have not been incurred yet. Net profit of the business can only be arrived after making a provision for such expenses or losses. A few examples of provisions are mentioned below:
- Provision for depreciation
- Provision for taxation
- Provision for bad and doubtful debts
- Provision for discount on debtors
Provisions are created by debiting the Profit and Loss Account on estimate basis. It is created on the basis of past experiences. A business may experience common losses, such as depreciation of fixed assets, taxation, etc. every year, which although are known; but, their exact amount in future period is unknown.
Therefore, a business always creates a provision based on certain percentage every year, which is purely based on the intuition and past experiences. These undetermined liabilities in form of provisions are kept aside, which will help future business activities, undisturbed from the future losses.
Accounting treatment for provision for doubtful debts is:
Profit and Loss A/c Dr. To Provision for Doubtful Debts (Provision for doubtful debts made)
The actual amount of expenses or losses for the current accounting period cannot be determined with certainty as they have not been incurred yet. Net profit of the business can only be arrived after making a provision for such expenses or losses. A few examples of provisions are mentioned below:
- Provision for depreciation
- Provision for taxation
- Provision for bad and doubtful debts
- Provision for discount on debtors
Provisions are created by debiting the Profit and Loss Account on estimate basis. It is created on the basis of past experiences. A business may experience common losses, such as depreciation of fixed assets, taxation, etc. every year, which although are known; but, their exact amount in future period is unknown.
Therefore, a business always creates a provision based on certain percentage every year, which is purely based on the intuition and past experiences. These undetermined liabilities in form of provisions are kept aside, which will help future business activities, undisturbed from the future losses.
Accounting treatment for provision for doubtful debts is:
| Profit and Loss A/c | Dr. | |
| To Provision for Doubtful Debts | ||
| (Provision for doubtful debts made) |
