Definition and Meaning
In the business world, a lot of sales transactions happen on credit, i.e. after a specified period of time. In this scenario, there are two main types of discounts allowed to customers. One is trade discount and the other is a cash discount.
Now, after anticipating the amount of cash discount allowable to debtors, a separate “provision for discount on debtors account” is opened and it is very similar to the “provision for doubtful debts account”. The only difference between the two is that provision for a discount is calculated on the debtors’ balance after deducting the provision for doubtful debts.
Journal Entry to Create Provision for Discount on Debtors
|Profit & Loss A/C
|To Provision for Discount on Debtors A/C
- If a provision for discount on debtors exists at the time of providing the discount, then write off the discount from that provision.
- A new provision should then be calculated to the extent of bringing the existing provision to the new figure. A journal entry would include debiting P&L account and crediting provision for discount on debtors.
- If new provision required is lower than the provision already existent, then we need to transfer the difference to P&L account. In this case, the journal entry would be reverse of what is mentioned in the previous point.
Bad debts after trial balance, provision for doubtful debts and provision for discount on debtors will appear on the balance sheet as shown below;
|Minus: Bad debts
|Minus: Provision for doubtful debts
|Minus: Provision for discount on debtors