Question

$X$ and $Y$ are partners in a firm sharing profits in the ratio of $3:2$. They admitted $Z$ as a new partner for $1/4^{th}$ share of profits. At the time of admission of $Z$ Debtors and Provision for Doubtful Debts appeared at $Rs.76,000$ and $Rs.8,000$ respectively. $Rs.6,000$ of the debtors proved bad. A provision of $5\%$ is to be created on Sundry Debtors for doubtful debts. Pass the necessary Journal entries.

Answer 1

Provision for doubtful debts is created as a reserve for any bad debt that occurs. According to company's credit policies and other information, some percentage is fixed over sundry debtors as provision.

In the question sundry debtors balance is 76,000 and provision for doubtful debt is 8,000. We need to pass journal entries for the bad debt that occurred and 5% provision that needs to be maintained.

Bad Debt A/c Dr 6,000

To provision for doubtful debts A/c 6,000

(Transfer of bad debts to provision for doubtful debt A/c)

P&L A/c Dr 1,800

To Provision for doubtful debts A/c 1,800

Notes:- New provision to be created = 5%* 76,000 = 3,800

Add:- Bad debts = 6,000

Less:- Old provision =( 8,000)

Balance provision to be created from P&L = 1,800