Provision for Doubtful Debts Video Lecture - Commerce

provision for doubtfulness what is
provision for doubtful date provision
for doubt for this when a debt is bad it
is written off when a provision when
when a debt is a doubtful sometimes it
is considered prudent to create a
provision for such doubtful net
what is this provision for a doubtful
net because we expect we expect we go
through the debtors and we expect some
of the balances slightly lift out full
of recovery we don't think some of these
debtors are going to play pay up so in
that case it is considered more prudent
it is considered more prudent to create
our provision that is remove a part of
the profits in anticipation of the
future losses and create a provision why
is this created what is the logic it is
something like this that one we have
sales in the current year
debtors are created in the current year
when we expect any one of these debtors
which have a wrestle in the current year
to be doubtful that is money would not
be received
it is only light it is only right that
this loss of the money that will not be
received the money which may not come in
this loss is set-off against this
against these sales against the revenue
which is a recent in the current clear
so as a prudent measure one we can say
it is an anticipation of an expected
loss two we can say there are two
concepts and the second what we say is
that it is matching sales of the current
since this loss will be with respect to
the sales which has occurred in the
current year let us create a provision
so that this year's profits this year
there is a matching of the costs of the
revenue and this revenue will not be
collected fully therefore let as a right
of a part of this revenue as a provision
for doubtful debt we cannot write off a
bad debt unless we know for certain that
the person will not pay up so what do we
do instead instead we create a provision
what is creating a provision we take it
out of the profit and loss account
profit and loss account debit to
provision for doubtful debts to
provision for doubtful place profit and
loss account debit to provision for
doubt so as a result the profits come
down and we have an account called
provision for doubtful debts with a
credit balance where does this appear in
the balance sheet we have debtors let's
say of 50000 let's say there were bad
debts which we knew after preparation of
the trial balance of an amount of 5
thousand so we have 45 thousand is the
debtors and we think that there will be
a provision of let us say 2250 less
provision for doubtful debts will deduct
this maybe 2250 in which case this gives
us 14 2250 will be the balance of
debtors in the balance sheet
so provision for doubtful debt is a
provision which is created a part of the
profits which is set aside because we
expect we anticipate a future bad debt
future bad debt we feel a debt is
doubtful so why is it created to satisfy
two concepts one is conservatism since
we anticipate a loss we make a provision
firm and also to satisfy the matching
cons sales have arisen in the current
year these bad debts may arise and may
arise as a result of the sales of this
current there if this loss arises it is
only fair to set it off against these
sales of the current here so we've
reduced the profits we can create a
provision account by saying debit profit
and loss account credit provision for
doubtful debts so the profit stand
reduced we have now a provision for
doubtful debts account balance with a
credit balance this is shown as a
deduction from debtors this is shown as
a deduction from debtors in the balance
sheet sometimes provision is created as
a percentage of the debtors created as a
percentage of the closing balance of
debtors in this case for example a
provision may be asked to be created at
the rate of 5 percent on debtors in that
case any bad debts which are outstanding
is written off and on the final letters
of say 45,000 we may create a provision
of 5%