What
is meant by provision for doubtful-debts? How are the relevant
accounts prepared and what journal entries are recorded in the final
accounts? How is the amount for provision for doubtful-debts
calculated?
What is meant by provision for doubtful-debts? How are the relevant accounts prepared and what journal entries are recorded in the final accounts? How is the amount for provision for doubtful-debts calculated?
The provision for doubtful-debts is provided after deducting the amount
of bad-debts from the debtors. The provision for doubtful-debts is provided
because of the rationale that the actual amount of bad-debts will only be known
in the next year, when the amount of debtors will get realised. Thus, it will
only then be known as to how many of the debtors have become bad. Thus, in
order to bridge-up the expected future loss, we create a provision for doubtful-debts.
For the provision for doubtful-debts, we prepare debtors account and
provision for doubtful-debts account. For recording bad-debts, the following
journal entry is passed.
Profit and Loss A/c
Dr.
To Provision for Bad and Doubtful Debts A/c
Example: An extract from a Trial Balance as on December 31, 2010.
Debtors
10,500
Provision for Doubtful Debts as on January 01, 2010
1,000
Bad Debts Account
1,500
Adjustment:
(i) Further bad-debts amount to Rs 500.
(ii) Create a provision for doubtful-debts at 5% on debtors.
Explanation
The provision for Doubtful Debt as on January
01, 2010 was Rs 1,000 and the Bad Debts during the year were Rs 1,500.
In addition to this, there was a further Bad Debt of Rs 500 which was known at
the end of the year i.e., December 31, 2010. Now we need to create a provision
for Doubtful Debts at 5% on debtors.
Profit and Loss A/c
Dr.
Cr.
Particulars
Amount
Particulars
Amount
Bad Debts
1,500
Add: Further Bad Debts
500
Add: New Provision for Doubtful Debts
500
Less: Old Provision (given in Trial Balance)
1,000
1,500
Balance Sheet
Liabilities
Amount
Assets
Amount
Debtors
10,500
Less:
Further Bad Debts
500
10,000
Less:
New Provision for Doubtful Debts
500
9,500
The amount of provision for Doubtful Debts is calculated by debiting
the amount of further Bad Debts from debtors and calculating the given
percentage of provision on remaining debtors. This provision is added to the Bad
Debts amount in the profit and loss account and deducted from debtors in the assets
side of a Balance Sheet.
The provision for doubtful-debts is provided after deducting the amount of bad-debts from the debtors. The provision for doubtful-debts is provided because of the rationale that the actual amount of bad-debts will only be known in the next year, when the amount of debtors will get realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus, in order to bridge-up the expected future loss, we create a provision for doubtful-debts.
For the provision for doubtful-debts, we prepare debtors account and provision for doubtful-debts account. For recording bad-debts, the following journal entry is passed.
|
Profit and Loss A/c |
Dr. |
|
|
|
To Provision for Bad and Doubtful Debts A/c |
|
Example: An extract from a Trial Balance as on December 31, 2010.
|
Debtors |
10,500 |
|
Provision for Doubtful Debts as on January 01, 2010 |
1,000 |
|
Bad Debts Account |
1,500 |
|
|
|
Adjustment:
(i) Further bad-debts amount to Rs 500.
(ii) Create a provision for doubtful-debts at 5% on debtors.
Explanation
The provision for Doubtful Debt as on January 01, 2010 was Rs 1,000 and the Bad Debts during the year were Rs 1,500. In addition to this, there was a further Bad Debt of Rs 500 which was known at the end of the year i.e., December 31, 2010. Now we need to create a provision for Doubtful Debts at 5% on debtors.
|
Profit and Loss A/c |
||||||
|
Dr. |
Cr. |
|||||
|
Particulars |
|
Amount |
Particulars |
Amount |
||
|
Bad Debts |
1,500 |
|
|
|
|
|
|
|
Add: Further Bad Debts |
500 |
|
|
||
|
|
Add: New Provision for Doubtful Debts |
500 |
|
|
||
|
|
Less: Old Provision (given in Trial Balance) |
1,000 |
1,500 |
|
||
|
|
|
|
|
|||
|
Balance Sheet |
|||||
|
Liabilities |
Amount |
Assets |
Amount |
||
|
|
|
Debtors |
10,500 |
|
|
|
|
|
Less: Further Bad Debts |
500 |
|
|
|
|
|
10,000 |
|
||
|
|
|
Less: New Provision for Doubtful Debts |
500 |
9,500 |
|
|
|
|
|
|||
The amount of provision for Doubtful Debts is calculated by debiting the amount of further Bad Debts from debtors and calculating the given percentage of provision on remaining debtors. This provision is added to the Bad Debts amount in the profit and loss account and deducted from debtors in the assets side of a Balance Sheet.
