Gorika Mehta In: Category - Accounting Others How to calculate provision for doubtful debts? Calculateprovision for doubtful debts Share Facebook 1 Answer Voted Recent Aastha 2020-08-29T21:46:39+05:30Added an answer on August 29, 2020 at 9:46 pm 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 Particulars Amount 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 Debts XXXXX For Example, Trial balance Particulars Dr Amount Cr Amount Bad Debts 400 Reserve for Bad Debts 1500 Sundry Debtors 16,000 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. Particulars Amount 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. 2 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerCancel replyYou must login to add an answer. Username or email* Password* Captcha* Click on image to update the captcha. Remember Me! Forgot Password?