Question

What is meant by provision for doubtful-debts? How are the relevant accounts prepared and what journal entries are recorded in the final accounts? How is the amount for provision for doubtful-debts calculated?

Answer 1

The provision for doubtful-debts is provided after deducting the amount of bad-debts from the debtors. The provision for doubtful-debts is provided because of the rationale that the actual amount of bad-debts will only be known in the next year, when the amount of debtors will get realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus, in order to bridge-up the expected future loss, we create a provision for doubtful-debts.

For the provision for doubtful-debts, we prepare debtors account and provision for doubtful debts account. For recording bad-debts, the following journal entry is passed Profit and Loss Dr

To Provision for Bad and Doubtful Debts A/c Let us take an example to understand how bad debts and provision for doubtful debts are recorded. An extract from a trial balance on March 31, 2005 is given below:

Additional information: 

Write-off further bad debts Rs. 2,000 and create a provision for doubtful debts @ 5% on debtors. 

In this case, the following journal entries will be recorded :

Only relevant items. 

Note: The amount of new provision for doubtful debts has been calculated as follows: Rs. 62,000 × 1,550.