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

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Solution

The provision for doubtful-debts is created with the motive of minimising the effect of actual loss caused by the bad-debts. The actual figure of the current year’s bad-debts will be known in the next year with the realisation of debtors. At that point of time, it will be known as to how many of the debtors have become bad. Thus, instead of waiting for the realisation of debtors, we create a provision for doubtful-debts in order to cover the expected future loss associated with the debtors becoming bad.

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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?

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.

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

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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