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Meaning of Provision for Doubtful Debts
Almost every business entity has some debtors, of which recovery is doubtful. It may not be realised. For this purpose, provision is created which is known as provision/reserve for doubtful debts. This provision is created on the basis of experiences of the previous years. It is an anticipated loss therefore provision for doubtful debts is necessary.
Treatment of Provision for Doubtful Debts in Balance Sheet
|Balance Sheet||It is calculated on the following amount:
Sundry Debtors – Bad Debts
|Deducted from Accounts Receivables/Sundry Debtors under the head Current Assets|
Let me help you understand the treatment better with the help of an example using the trial balance and balance sheet.
Show treatment of Provision for Doubtful Debts in the Balance Sheet of ABC Ltd.
5% provision for doubtful debts is calculated on 500,000 (5% * 500,000 = 25,000) & deducted from sundry debtors.