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Provision for Doubtful Debts


We know that in accounting we follow the 'Convention of Conservatism' while recording business transactions. This means that we make provisions for expected losses but we do not take credit for expected profit. A firm, therefore, make provision at the ned of the accounting year for likely bad debts in the next year. This is for the simple reason that out of the credit sales made during the particular year, some debts are likely to become bad in the next year due to non - payments. The correct accounting is to make provision for such likely bad debts every year. The entry for creating a provision is:
Profit and loss A/c Dr.
To Provision for Doubtful Debts

 

The debit to the Profit and Loss Account will reduce the year's profit suitably for the possible loss and the amount will be carried forward to the next year. Next year, when bad debts actually occur and are written off, the Bad Debts accounts will be debited to the Provision for Bad Debts Account; the amount of the bad debts will not be debited to the Profit and Loss Account since a debit was already given for it last year. It should be noted that the customer's account or sundry debtors account is not affected by creation of the Provision for Doubtful Debts. When the debit is doubtful of recovery, the personal account of the debtor will not be credited as the recovery is still possible. The provision for doubtful debts accounts is deducted from the amount of book debts in the Balance Sheet but the two accounts are separate. The Provision for Doubtful Debts Account may appear as follows (amounts assumed):

PROVISION FOR DOUBTFUL DEBTS ACCOUNT
Dr.         Cr.

Date

Particulars

Rs.

Date

Particulars

Rs.

2007

Dec 31


Dec 31

 



To Bad Debts

To Balance C/d (balance required)

 

 

430


650

 

 

 

 

1080

2007

Jan 1

 



By Balance C/d (From last year)

By P& L A/c (Amount required to make up to the balance)

 

 

 

500

 

 

 

580

 

 


1080

The amounts in the account given above, as an illustration, mean the following-
  1. In the Profit and Loss A/c of 2006 a sum of Rs. 500 was debited and credited to the Provision for Doubtful Debts A/c. Thus, this account opens with this balance.
  2. During the year 2007 bad debts totaled Rs. 430. these have been debited to the provision for Doubtful Debts Account and not to the Profit and loss Account.
  3. The Balance required in the provision at the end of 2007 is Rs. 650. This has been put on the debit side, to be carried down to the next year.
  4. The credit side is now short by Rs. 580, indicating the debit now required to the Profit and Loss Account to make up the balance.
Example 7 - The amount of sundry debtors in a Trial Balance is Rs. 7,00,000. You are required to write off Rs. 5, 000 as bad debts and make a provision for doubtful debts @ 10% on sundry debtors. Pass the necessary journal entries.

 

Date

Particulars

LF

Debit (Rs.)

Credit Rs.)

 

Bad Debts A/c

To Sundry Debtors

(Being bad debts written off)

 

5,000

 

 

5,000

 

Profit and Loss A/c (Note 1)

To Bad Debts

(Being bad debts transferred to Profit and Loss Account)

 

5,000

 

 

5,000

 

Profit and Loss A/c (Note 2)

To Provision for Doubtful Debts A/c

(Being Provision made for Doubtful Debts @ 10% on Sundry Debtors)

 

69,500

 

 

69,500


Notes:
  1. Bad Debts Account has been transferred to the Profit and Loss Account because there is no existing provision for doubtful debts. The provision now created is meant for meeting bad debts to be written off in the next year.
  2. Provision is made on Rs. 6, 95, 000( Rs. 7,00,000 – Rs. 5,000 as bad debts written off). 10% of Rs. 6,95,000 is Rs. 69, 500.
Example 8 - Following are the extracts from the Trial Balance of a firm as on 31st March 2008.

 

TRIAL BALANCE AS AT 31st March 2008.....

Particulars

Debit Rs.

Credit Rs.

Sundry Debtors

4,10,000

 

Provision for Doubtful Debts

 

20,000

Bad Debts

6,000

 

Additional Information -
  1. Additional bad debts Rs. 10,000
  2. Maintain the Provision for Doubtful Debts @ 10% on debtors.
Pass the necessary journal entries and show the relevant accounts.

 

Profit and Loss Account

Dr.     Cr.

Particulars

Rs.

Particulars

Rs.

To Bad Debts            6,000

Add:New Bad debts 10,000

                             ---------

                            16,000

Add: New Provision 40,000

                           ----------

                            56,000

Less: Old Provision 20,000

                           ---------

 

 

 

 

 

 

 

 

 


36,000

 

 

 

 

 

 

Balance Sheet as at 31st March 2008

Liabilities

Rs.

Assets

Rs.

   

Sundry Debtors       4,10,000

Less:New Bad debts 10,000

                          ------------

                            4,00,000

Less: Provision for

Doubtful Debts          40,000

                           ------------

 

 

 

 

 

 

 

3,60,000





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