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Singh Arjun

How to calculate provision for discount on debtors?

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1 Answer

  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 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.

    • 0

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