Question

What is meant by provision for doubtful debts? Why is it created?

Answer 1

1. Provision for bad and doubtful debts refers to the amount set aside as a charge against profit to meet any loss arising due to bad debt in the future.
2. At the end of the accounting period, there may be certain debts that are doubtful, i.e., the amount to be received from debtors may or may not be received.
3. The reason may be the incapacity to pay the amount of deficit.
4. In general, based on past experience, the amount of doubtful debts is calculated on the basis of some percentage on debtors at the end of the accounting period after deducting further bad debts (if any).
5. Since the amount of loss is impossible to ascertain until it is proved bad, doubtful debts are charged against profit and loss accounts in the form of provision.
6. A provision for doubtful debts is created and is charged to the profit and loss account. When bad debts occur, it is transferred to provision for doubtful debts account and not to profit and loss account.