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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 transactions 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
|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|
|Less Old Provision for Bad Debts (It shall be given in the trial balance on the credit side)||(XXXXX)|
|New Provision/Reserve for Bad Debts||XXXXX|
|Particulars||Dr Amount||Cr Amount|
|Reserve for Bad Debts||1500|
Adjustment: Provide a 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.
|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|
|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 examples for you to understand how to compute Bad Debt Reserve hoping that it would be helpful for you.