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Discy Latest Questions

  1. This answer was edited.

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses. Provision is created because they accRead more

    In this business world, most of the transactions take place on credit rather than cash so the amount of risk involved is high. To minimize this risk many organization decides to allocate a certain portion towards provision for all the future expenses and losses.

    Provision is created because they account for particular company expenses and payments for the current year. This makes organization financial statements to look more precise. Provision is created from company profit to meet all the uncertain future obligations.

    Meaning of Provision for Doubtful Debts-

    The term provision for doubtful debts refers to the estimated (or) predicted value of bad debts that arises from the sundry debtors that have been issued but have turned out to be uncollectible. It takes place when a credit sale to the customer is made. Provision for Doubtful debt is a contra account and it is also known as Provision for bad debts.

    Reason for creating Provision for Doubtful Debts-

    In Accounting, Provision for Doubtful debts is created to abide with the conservatism convention and prudence principle which states that “don’t account for future anticipated profits but account for all possible losses”. Provision for Doubtful debts is an expense which occurs in the normal course of business.

    Various organizations create a provision for all the future expected expenses and losses which may arise due to the credit sales so the organization needs to create a percentage of such provision on the net value of sundry debtor for complying with all the future uncertainties.

    Example- ABC Ltd furnishes you with the following information about Total sales for the current accounting year

    ParticularsAmount
    Total Sales6,00,000
    Cash Sales2,00,000
    Credit Sales4,00,000
    Bad Debts40,000

    The company decided to create 5% provision of doubtful debts on sundry debtors. Comment upon its decision.

    Calculation of Provision for Doubtful Debts-

    Step 1– Calculate Net value of sundry debtors

    Net Sundry Debtors = Sundry Debtors – Bad Debts

    = 4,00,000 – 40,000 => 3,60,000

    Step 2 – Create 5% provision on net value of sundry debtors

    Provision for Doubtful Debts = 3,60,000 * 5/100

    = 18,000

    The decision on creating a provision for doubtful debts will help the company to mitigate (or) reduce all the future obligations and uncertainties which arise due to the bad debts.

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  1. I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same. Provision for Bad and Doubtful Debt Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables. When anRead more

    I think you should first understand what does the provision for doubtful debt mean and then understand the calculations of the same.

    Provision for Bad and Doubtful Debt

    Provision for bad and doubtful debt is a contra asset i.e it reduces the balance of an asset specifically the receivables.

    When an entity executes transaction of sales on a credit basis it creates and adds on to the amount due from sundry debtors.  These sundry debtors as per the agreed terms are liable to make a payment for such goods purchased before the end of the credit term.

    If such debtor continuously makes a default such debtor shall be considered as a bad debt for the organization. When an entity remains doubtful regarding the recovery of its revenue i.e it has a reason to believe that such an amount due to be received may not be realised. Thus the entity shall create a reserve or a provision for doubtful debts.

    The provision is created based on the entity’s past experience in the business and various other factors.

    How is it calculated?

    The table given below will help you to understand step by step calculations to compute provision for doubtful debts

    ParticularsAmount
    Old Bad Debts (It shall be given in the Trial Balance on the Dr side)XXXXX
    Add New Bad Debts (It shall be given in the adjustment)XXXXX
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts)XXXXX
     XXXXX
    Less Old Provision for Bad Debts (It shall be given in the trial balance on the credit side)(XXXXX)
    New Provision/Reserve for Bad DebtsXXXXX

     

    For Example,

    Trial balance

    ParticularsDr Amount       Cr Amount
    Bad Debts400 
    Reserve for Bad Debts 1500
    Sundry Debtors16,000 

     

    Adjustment: Provide 2% reserve for bad and doubtful debts on the debtors. And it was realized that our debtor worth 1000 proved to be bad has been written off.

    ParticularsAmount
    Old Bad Debts (Given in Trial Balance)400
    Add New Bad Debts (posted from  adjustment)1,000
    Add New Bad Debt Reserve (Debtors x %/100) (It shall be given in the adjustment) i.e (% of Debtors – New Bad Debts) = (16,000 – 1,000) X 2 %  300
     1,700
    Less Old Provision for Bad Debts (Giving effect to an adjustment)(1500)
    New Provision/Reserve for Bad Debts  200

     

    I have tried to put up both explanation and numerical example for you to understand how to compute Bad Debt Reserve hoping that it would be helpful for you.


    Aastha Mehta.

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  1. Meaning of Provision for Doubtful Debts Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the prRead more

    Meaning of Provision for Doubtful Debts

    Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the previous years. It is an anticipated loss therefore provision for doubtful debts is necessary.

    Treatment of Provision for Doubtful Debts in Balance Sheet

    Financial StatementCalculationTreatment
    Balance SheetIt is calculated on the following amount:

    Sundry Debtors – Bad Debts

    Deducted from Accounts Receivables/Sundry Debtors under the head Current Assets

    Let me help you understand the treatment better with the help of an example using trial balance and balance sheet.

    Example

    DEbtors in TB & RDD Adjustment

    Show treatment of Provision for Doubtful Debts in the Balance Sheet of ABC Ltd.

    RDD in Balance Sheet

    5% provision for doubtful debts is calculated on 500,000 (5% * 500,000 = 25,000) & deducted from sundry debtors.

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  1. This answer was edited.

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a proRead more

    In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a provision for the same.

    Treatment of provision for doubtful debts

    It is not known by many that provision for doubtful debts can appear in the trial balance of a company. It has a credit balance as it is an accounts receivables contra account. In case it is shown in the trial balance it will be recorded in ONE place only i.e. on the credit side of the profit and loss account.

    It is important to note that provision for doubtful debts can either appear in the trial balance or as an adjustment entry. In case it appears in the trial balance the above-mentioned treatment has to be followed however, in case it appears as an adjustment entry then it will be recorded on the credit side of the profit and loss a/c  as well as on the liabilities side of the balance sheet.

    Placement of provision for doubtful debts in the trial balance

    The trial balance of XYZ Ltd. is as follows:

    trial balance

    In the Profit and loss a/c

    p/l a/c

    In the balance sheet

    balance sheet

    Hope this helps.

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