Provision for Doubtful Debts:

To account for the possibility of non-payment by debtors, businesses make a provision for doubtful debts. This provision is made by estimating the percentage of debtors that may default on their payments. In this case, the provision for doubtful debts is 5% of the total outstanding balance of Sundry Debtors.

Calculation of Provision for Doubtful Debts:

Total Sundry Debtors = 30,600
Provision for Doubtful Debts (5%) = 1,530

Provision for Discount on Debtors:

Businesses often offer discounts to their customers to incentivize prompt payment. However, this discount reduces the amount of revenue received by the business. To account for this reduction in revenue, businesses make a provision for discount on debtors. In this case, the provision for discount on debtors is 2% of the total outstanding balance of Sundry Debtors.

Calculation of Provision for Discount on Debtors:

Total Sundry Debtors = 30,600
Provision for Discount on Debtors (2%) = 612

Provision for Bad Debts:

Provision for bad debts is made to account for the possibility of non-payment by debtors that have already been identified as bad debts. In this case, the provision for bad debts is already given as 1,000.

Further Bad Debts:

The business has identified additional bad debts of 600. This means that the total amount of bad debts for the business is now 1,600.

Calculation of Provision for Sundry Debtors:

Total Sundry Debtors = 30,600
Provision for Doubtful Debts = 1,530
Provision for Discount on Debtors = 612
Provision for Bad Debts = 1,600
Total Provision for Sundry Debtors = 3,742

Explanation:

The provision for bad debts is made to account for the possibility of non-payment by debtors that have already been identified as bad debts. The provision for doubtful debts is made to account for the possibility of non-payment by debtors that are not yet identified as bad debts. The provision for discount on debtors is made to account for the reduction in revenue caused by offering discounts to customers. The total provision for sundry debtors is the sum of all three provisions.