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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 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, a 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/c
|To Provision for Discount on Debtors A/c
Treatment of Provision for Discount on Debtors in Final Accounts
|Profit & Loss Account
|Presented on the Debit side of Profit & Loss account
|Deducted 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.