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Provision for Discount on Debtors Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

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FAQs on Provision for Discount on Debtors Video Lecture - SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

1. What is provision for discount on debtors?
Ans. Provision for discount on debtors is a financial arrangement made by a company to account for potential discounts that may be given to customers who pay their debts promptly. It is a liability that represents the estimated amount of discounts that the company expects to provide to its debtors.
2. How is provision for discount on debtors calculated?
Ans. Provision for discount on debtors is typically calculated as a percentage of the total debtors outstanding. The percentage is based on historical data and industry trends. For example, if the company expects that 5% of its debtors will take advantage of the prompt payment discount, it will calculate the provision by multiplying the total debtors outstanding by 5%.
3. Why do companies make provision for discount on debtors?
Ans. Companies make provision for discount on debtors to account for the potential loss of revenue due to offering discounts to customers who pay their debts promptly. By creating this provision, companies can accurately reflect the financial impact of these discounts on their balance sheets and income statements.
4. How does provision for discount on debtors affect a company's financial statements?
Ans. Provision for discount on debtors affects a company's financial statements by increasing its liabilities and reducing its net income. The provision is recorded as a liability on the balance sheet, which reduces the company's equity. Additionally, the provision is expensed on the income statement, reducing the company's net income.
5. Can provision for discount on debtors be reversed or adjusted in the future?
Ans. Yes, provision for discount on debtors can be reversed or adjusted in the future. If the actual amount of discounts given to debtors is different from the estimated provision, the company can adjust the provision accordingly. This adjustment is typically made at the end of the accounting period and is based on the actual discounts provided to debtors.
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