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Gorika Mehta

How to calculate provision for doubtful debts?

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1 Answer

  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 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.

    • 1

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