Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

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Solution

Generally, bad debts get recorded and charged to profit and loss account in an accounting year which is different from the accounting year in which credit sale have been made. To ensure proper matching of revenues and expenses and calculate true profit, it is necessary that expenses on account of non-recovery of an amount from debtors are treated as expenses in the period in which credit sales are made.

As the exact amount of bad debts cannot be calculated at the time of sale, it is suggested that provision for doubtful debts is created in the year of sale and charged to profit and loss account of that year.

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Similar questions

Q. Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?

Which account is credited while creating a provision for doubtful debts in the books?

Q. Question: An extract of Trial balance from the books of Tahiliani and Sons Enterprises on December 31, 2005, is given below.

Name of Account	Debit Amt. (Rs)	Credit Amt. (Rs)
Sundry debtors	$50, 000$
Bad debts	$6, 000$
Provision for doubtful debts		$4, 000$

Additional Information
Bad Debts proved bad not recorded amounted to Rs

2, 000

.
Provision is to be maintained at

8 %

of Debtors.
Give necessary accounting entries for written off the bad debts and creating the provision for doubtful debts account. Also, show the necessary accounts.

An extract of Trial balance from the books of Tahiliani and Sons Enterprises on Marc 31 2017 is given below:

Name of the Account	Debit Amount Rs	Credit Amount Rs

Sundry debtors	50,000
Bad debts	6,000
Provision for doubtful debts		4,000

Additional Information:

Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also, show the necessary accounts.

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