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
| Particulars | Amount |
| Debtors | XXXXX |
| Less: Bad Debts | (XXXX) |
| XXXXX | |
| Less: Provision for Bad and Doubtful Debts | (XXXX) |
| Good Debts | XXXXX |
| 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:
| Particulars | Amount |
| Debtors | 50,000 |
| Less: Bad Debts | (4,000) |
| 46,000 | |
| Less: Provision for Bad and Doubtful Debts | (1,000) |
| Good Debts | 45,000 |
| 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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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
Treatment of Provision for Discount on Debtors in Final Accounts
Extract of Profit & Loss account and Balance Sheet have been attached for better understanding.
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