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Discy Latest Questions

  1. Meaning of Provision for Discount on Debtors In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends. So, at the end of every period, entities will have to estiRead more

    Meaning of Provision for Discount on Debtors

    In order to receive early payment from the debtors in the succeeding period, entities provide incentives to the debtors who are ready to pay the outstanding amount before their credit period ends.

    So, at the end of every period, entities will have to estimate the amount of discount which may be availed by the debtors in the succeeding period. This estimate will be based on past experience. Accordingly, provision will have to be created in the current period as the amount of discount is an expected loss for the entity. This provision is referred to as “Provision for Discount on Debtors”.

    Journal Entry for Provision for Discount on Debtors

    Profit & Loss A/cDebit
     To Provision for Discount on Debtors A/cCredit

    Treatment of Provision for Discount on Debtors in Final Accounts

    Financial StatementTreatment
    Profit & Loss AccountPresented on the Debit side of Profit & Loss account
    Balance SheetDeducted from Sundry Debtors under the head Current Assets (after deducting Bad Debts & Provision for Doubtful Debts)

    Extract of Profit & Loss account and Balance Sheet have been attached for better understanding.

    Provision for discount on debtors in P&L A/c

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  1. This answer was edited.

    Provision for Discount on Debtors The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the neRead more

    Provision for Discount on Debtors

    The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the next reporting period if such customer makes the payment promptly.

    The discount allowed reduces the revenue of an entity and hence, it can be said that provision for a discount is expected loss for an organization and so it needs to be given effect in the current accounting period.

    Calculation of Provision for Discount on Debtors

    ParticularsAmount
    DebtorsXXXXX
    Less: Bad Debts(XXXX)
    XXXXX
    Less: Provision for Bad and Doubtful Debts(XXXX)
    Good DebtsXXXXX
    Less: Provision for discount on debtors (Estimated % of Good Debts.)(XXXX)
    Debtors (Amount to be Shown in the Balance Sheet)XXXXX

    This can also be explained with the help of an example.

    Illustrative Example

    Calculate Debtors Balance to be shown in the Balance Sheet

    • An Entity has debtors worth 50,000
    • Bad debts throughout the year worth an amount of 4000
    • It has created a reserve for bad and doubtful debts at the end of the year worth 1000
    • The provision for discount on debtors is estimated to be 10%.

     

    Solution:

    ParticularsAmount
    Debtors50,000
    Less: Bad Debts(4,000)
    46,000
    Less: Provision for Bad and Doubtful Debts(1,000)
    Good Debts45,000
    Less: Provision for discount on debtors (45,000 X 10/100)(4,500)
    Debtors (Amount to be Shown in the Balance Sheet)40,500

    Aastha.

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