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Bad Debts, Provision for Bad and Doubtful Debt Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

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FAQs on Bad Debts, Provision for Bad and Doubtful Debt Video Lecture - SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

1. What are bad debts?
Ans. Bad debts refer to the amounts owed by customers or clients that are considered uncollectible by a company. These debts are typically recognized as expenses on the income statement because the company does not expect to receive payment for them.
2. What is the provision for bad debts?
Ans. The provision for bad debts is an estimated amount set aside by a company to cover potential losses from bad debts. It is a contra-asset account that reduces the accounts receivable balance on the balance sheet, reflecting the anticipated amount of uncollectible receivables.
3. How is the provision for bad debts calculated?
Ans. The provision for bad debts is usually calculated as a percentage of the total accounts receivable balance. The percentage is based on historical data, industry trends, and the company's assessment of the collectability of its receivables. This provision acts as a buffer to absorb potential losses from bad debts.
4. What is a doubtful debt?
Ans. A doubtful debt is a debt that has a higher risk of becoming uncollectible compared to other accounts receivable. It is a debt where there is uncertainty about the customer's ability or willingness to pay. A company may classify certain debts as doubtful and make a provision for them to account for the potential loss.
5. How does the provision for bad and doubtful debts impact the financial statements?
Ans. The provision for bad and doubtful debts affects both the income statement and the balance sheet. On the income statement, the provision is recognized as an expense, reducing the company's net income. On the balance sheet, the provision reduces the accounts receivable balance, reflecting the estimated amount of uncollectible receivables. This adjustment helps provide a more accurate representation of the company's financial position.
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