Question

Explain the accounting treatment of bad debts, provision for doubtful debts, and provision for discount on debtors.

Answer 1

• Bad debts: In other words, debts that cannot be recovered or irrecoverable debts are called bad debts. It is a loss for the business and should be charged against profit.

• Provision for bad and doubtful debts:

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 deceit.
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.

• Provision for discount on debtors:

1. A cash discount is allowed by the suppliers to customers for prompt payment of the amount due either on or before the due date.
2. A provision created on sundry debtors for allowing such discount is called a provision for discount on debtors.