Provision for Bad and Doubtful Debts

Every business suffers a percentage of bad debts over and above the debts definitely known as irrecoverable and written off as Bad (Bad debts written off). If Sundry debtors figure is to be shown correctly in the Balance sheet provision for bad and doubtful debts must be adjusted. This Provision for bad and doubtful debts is generally provided at a certain percentage on Debtors, based on past experience.

While preparing final accounts, the bad debts written off given in adjustment is first deducted from the Sundry debtors then on the balance amount (Sundry debtors – Bad debt written off) provision for bad and doubtful debts calculated.

Example: The trial balance shows on 31.3.2004, Sundry Debtors as Rs.60,000.

Adjustment: Provide 5% provision for bad & doubtful debts on Sundry debtors.

Adjusting Entry

Date	Particulars	L.F	Debit Rs.	Credit Rs.
2004	Profit & Loss A/c                                                                      Dr		3,000
31-Mar	To Provision for bad & doubtful debts A/c			3,000
	(5% provision for bad and doubtful debts )

 

Provision for bad and doubtful debts will be shown

i) on the debit side of Profit and Loss Account and

ii) on the assets side of the Balance sheet by way of deduction from Sundry debtors (after Bad debts written off if any).

Profit & Loss Account
for the year ending 31st March, 2004
Dr.                                                                                                                                                                                                                                             Cr.

Particulars	Rs.	Particulars	Rs.
To Provision for bad and doubtful debts A/c	3,000

 

Balance Sheet as on 31st March, 2004

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
			Sundry debtors	60,000
			Less: Provision for bad and doubtful debts	3,000
					57,000

 

Example : The Trial Balance as on 31st March 2004 shows the following:

Sundry Debtors                                          Rs. 81,200

Adjustment: Write off Rs.1,200 as bad debts. Create a provision for Bad and doubtful debts @ 5% on Sundry Debtors.

Adjusting Entry

Date	Particulars	L.F	Debit Rs.	Credit Rs.
2004
31-Mar	Bad debts A/c                                                                                                                    Dr		1,200
	To Sundry debtors A/c			1,200
	(Bad debts written off)
	Profit and Loss A/c                                                                                                          Dr		4,000
	To Provision for Bad & doubtful debts			4,000
	(5% provision for bad & doubtful debts)

 

Note: 5% should be calculated on Rs.80,000 (i.e. The amount ofSundry debtors after writing off Bad Debts).

Profit and Loss Account for
the year ending 31st March, 2004

Dr.                                                                                                                                                                                                                                               Cr.

Particulars	Rs.	Rs.	Particulars	Rs.	Rs.
To Bad Debts A/c	1,200
To Provision for Bad & doubtful debts A/c	4000

 

Balance Sheet as on 31st March, 2004

Liabilities	Rs.	Rs.	Assets	Rs.	Rs.
			Sundry Debtors	81,200
			Less: Bad debts written off
				1,200
				80,000
			Less: Provision for Bad & Doubt- -ful debts	4,000
					76,000

 

Note:

Bad Debts Account
Dr.                                                                                                                                                                                                                                              Cr.

Particulars

Rs.

Particulars

Rs.

To Sundry Debtors A/c

1,200

By Profit & Loss A/c

1,200