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Why does provision for depreciation and provision for doubtful debts have a credit balance ?
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Why does provision for depreciation and provision for doubtful debts h...
Provision for Depreciation and Provision for Doubtful Debts
Credit Balance
Provision for depreciation and provision for doubtful debts are both accounting entries that are used to account for two different types of expenses that a company may incur. Both of these accounts have a credit balance, which means that they are added to the company's liabilities.
Provision for Depreciation
Provision for depreciation is an accounting entry that is used to account for the decrease in the value of a company's fixed assets over time. Fixed assets, such as buildings, machinery, and equipment, lose value over time due to wear and tear, obsolescence, and other factors. By creating a provision for depreciation, a company can account for this decrease in value over time and adjust the value of its assets on its balance sheet.
The provision for depreciation is a credit entry because it is added to the company's liabilities. This is because the decrease in the value of the fixed assets is seen as an expense that the company will have to pay in the future. By creating a provision for depreciation, the company is acknowledging this expense and setting aside funds to cover it.
Provision for Doubtful Debts
Provision for doubtful debts is an accounting entry that is used to account for the possibility that a company's customers may not pay their debts. This is a common issue for many businesses, and it can have a significant impact on their cash flow and profitability. By creating a provision for doubtful debts, a company can account for this risk and adjust its accounts receivable on its balance sheet.
The provision for doubtful debts is a credit entry because it is added to the company's liabilities. This is because the possibility of customers not paying their debts is seen as an expense that the company will have to pay in the future. By creating a provision for doubtful debts, the company is acknowledging this expense and setting aside funds to cover it.
Conclusion
In conclusion, both provision for depreciation and provision for doubtful debts are important accounting entries that help a company account for two different types of expenses. Both of these accounts have a credit balance because they are added to the company's liabilities. By creating these provisions, a company can better manage its finances and plan for the future.
Community Answer
Why does provision for depreciation and provision for doubtful debts h...
Provision for depreciation reduces the balance of a fixed asset. Therefore, it must be credited. The provision for doubtful debts is an accounts receivable contra account, so it should always have a credit balance.
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Why does provision for depreciation and provision for doubtful debts have a credit balance ?
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Why does provision for depreciation and provision for doubtful debts have a credit balance ? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Why does provision for depreciation and provision for doubtful debts have a credit balance ? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Why does provision for depreciation and provision for doubtful debts have a credit balance ?.
Why does provision for depreciation and provision for doubtful debts have a credit balance ? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Why does provision for depreciation and provision for doubtful debts have a credit balance ? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Why does provision for depreciation and provision for doubtful debts have a credit balance ?.
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