How to calculate provision for discount on debtors?

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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 an 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 Amt
Less: Bad Debts (Amt)
Amt
Less: Provision for Bad and Doubtful Debts (Amt)
Good Debts Amt
Less: Provision for discount on debtors (Estimated % of Good Debts.) (Amt)
Debtors (Amount to be Shown in the Balance Sheet) Amt

 

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