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Provision for Discount on Debtors


Debtors outstanding at the end of the year make payment in the next year and they may be entitled to cash discount if they make the payment by the due date. Because, the debt has arisen during the year, the discount is to be taken as expense for the year. Thus, a provision for discount on debtors is made.

 

The process is same as is for the provision for doubtful debts. The likely amount of the discount to be allowed is debited to the Profit and Loss Account and credited to the Provision for Discount Account. The balance in the latter account is deducted from book debts (Debtors) in the Balance Sheet and is carried forward to the next year. Discounts allowed to the existing debtors in the next year are debited to the Provision for Discount Account and not to the Profit and loss Account. The debit reduces the balance in the Provision account; it is made up to the required figure by a debit to the Profit and Loss Account and credit to the Provisions account just like the Provision for Doubtful Debts Account.

 

An important point to note is that discount is not allowed on debts that become bad. Therefore, the provision for discount is made for good debts only. In other words, the amount of the provision for discount is calculated after deducting bad debts and provision for doubtful debts from sundry debtors. Suppose, sundry debtors total Rs. 20, 000; provision for doubtful debts is required at 5% and provision for discounts at 2 ½ %. The provision for doubtful debts will be Rs. 1,000; the remaining amount is Rs. 19,000. the provision for discount will be 2 ½% of this figure - it will be Rs. 475.

 

Accounting Treatment
  1. Discount Allowed A/c Dr.
    To Debtors
    (Being discount allowed on debtors)
  2. Profit and Loss A/c Dr.
    To Discount Allowed A/c
    (Being discount transferred to Profit and loss A/c)
  3. Provision for Discount on Debtors A/c Dr.
    To Discount Allowed A/c
    (Being discount transferred to Provision for discount on debtors A/c)
  4. Profit and Loss A/c Dr.
    To Provision for discount on Debtors A/c
    (Being balance of provision for discount account being charged to Profit and Loss A/c)
Example 9 - The sundry debts of a firm as on 31st December 2008 were Rs. 40,000. on that date, it was decided to create a provision for discount at 2% on sundry debtors. During 2007, the actual amount of discount allowed was Rs. 400. The debtors on 31st December 2007 were Rs. 30,000 and it was again decided to create a provision for discount over Debtors at 2%. Prepare Discount account and provision for discount account for both the years.

 

Provision for Discount on Debtors A/c

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Balance C/d

 

To discount allowed A/c

To Balance c/d

800
------

 

 

400

600
-------
1,000
--------

 

By Profit and Loss A/c

 

 

By balance b/d

By Profit and Loss A/c

 

 

 

By balance b/d

800

 

 

800

200

-------1,000
--------

 

600

 

Discount Allowed A/c

Particulars

Rs.

Particulars

Rs.

To sundry Debtors

400

By Provision for Discount A/c

400





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