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Accounting Treatment for Provisions


The accounting treatment is similar for all types of provisions. Hence, the accounting treatment is explained here taking up the case of provision for doubtful debts.

 

As already stated that when business transaction takes place on credit basis, debtors account is created and its balance is shown on the asset-side of the balance sheet.

These debtors may be of three types:
  • Good Debtors are those from where collection of debt is certain.
  • ​Bad Debts are those debtors from where collection of money is not possible and the amount of credit given is a certain loss.
  • Doubtful Debts are those debtors who may pay but business firm is not sure about the collection of full amount from them. In fact, as a matter of business experience, some percentages of such debtors are not likely to pay, hence treated as doubtful debts.
To consider this possible loss on account of non-payment by some debtors, it is a common practice and necessary also to make a suitable provision for doubtful debts at the time of ascertaining true profit or loss. The provision for doubtful debts is usually calculated as a certain percentage of the total amount due from sundry debtors after deducting/writing-off all known bad debts.

Provision for doubtful debts is also called 'Provision for bad and doubtful debts'. It is created by debiting the amount of required provision to the profit and loss account and crediting it to provision for doubtful debts account.

 

For creating a provision for doubtful debts the following journal entry is recorded:
Profit and Loss A/c Dr.                         (with the amount of provision)
To Provision for doubtful debts A/c

 

This is explained with the help of the following example Observe an extract of the trial balance from the books of Trehan Traders on March 31, 2005 is given below:

 

Date

Account Title

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

 

Sundry Debtors

 

68,000

 


Additional Information
  • Bad debts proved bad but not recorded amounted to Rs. 8,000
  • Provision is to be maintained at 10% of debtors.
In order to create the provision for doubtful debts, the following journal entries will be recorded:

Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2005

Mar. 31

 


Mar.31

 

 

Mar. 31

 

 

Bad debts A/c Dr.

To Sundry debtors A/c

(Bad debts written off)

Profit & Loss A/c Dr.
To Bad debts A/c (Bad debts debited to profit and

loss account)

Profit and Loss A/c
To Provision for doubtful debts a/c

(For creating provision for doubtful debts)

dry Debtors

 

 

8,000

 

 

8,000

 

 

6,000

 

 

8,000

 

 

8,000

 

 

6,000


Working Notes
Provision for doubtful debts @10% of sundry debtors i.e.
(Rs. 68,000 - 8000) = Rs. 60001




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