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In simple words, provision for doubtful debts refers to the amount set aside as a provision from the profits of the business for the amount that is doubtful to be received in the future. Based on past trends, a business determines the approximate amount of doubtful debts every year and creates a provision for the same.
Treatment of provision for doubtful debts
It is not known by many that provision for doubtful debts can appear in the trial balance of a company. It has a credit balance as it is an accounts receivables contra account. In case it is shown in the trial balance it will be recorded in ONE place only i.e. on the credit side of the profit and loss account.
It is important to note that provision for doubtful debts can either appear in the trial balance or as an adjustment entry. In case it appears in the trial balance the above-mentioned treatment has to be followed however, in case it appears as an adjustment entry then it will be recorded on the credit side of the profit and loss a/c as well as on the liabilities side of the balance sheet.
Placement of provision for doubtful debts in the trial balance
The trial balance of XYZ Ltd. is as follows:
In the Profit and loss a/c
In the balance sheet
Hope this helps.
