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 |