Treatment of Provision for Doubtful Debt Video Lecture - Commerce

provision for doubtful debts sometimes
it is considered prudent to provide for
doubtful debts if a debt is bad we know
for a certainty it cannot be collected
then we write it off to a bad debt
account but suppose we suspect that a
certain that may be may or may not be
collected there is a doubt regarding its
collection it is suggested that we make
a provision for doubtful debts in the
current year though we may or such a bad
debt may arise only in the subsequent
year we are conservative and if we
anticipate losses as per the
conservatism concept we should provide
for all and dissipated losses so how do
we create a provision for doubtful debts
the entry to create a provision is
profit and loss account debit to
provision for doubtful nets to provision
for doubtful deaths this is how we
create a provision for doubtful ends how
is this shown in the final accounts in
the final accounts when we create a
provision profit and loss account debit
to provisions for doubtful debts this is
how we create and this provision account
is shown as a deduction from debtors on
the asset side of the balance sheet in
the balance sheet we show debtors less
provision for doubtful debts less
provisioned for doubtfulness now it is
possible that we create a provision for
doubtful debts and we also have a bad
debt adjustment what happens is when we
have created this provision for doubtful
debts in the subsequent year when a bad
debt arises instead of writing the bad
debt writing off the bad day
to the profit and loss account we had
just it with the provision for doubtful
debts we adjust it with the provision
for doubtfulness the provision to that
extent will reduce if we need to create
if we need further provision then we
pass another entry profit and loss
account debit to provision for doubtful
trades so bad debts may be adjusted
against provision for doubtful debts
provision for doubtful debts account
debit to provision for doubtful debts
account debit to bad debts the provision
is often taken as a percentage of the
debtors percentage of the debtors in
such a case whatever debtors appears in
the balance sheet that does less if
there were any bad debts so we have a
figure for debtors less bad debts the
figure of debtors that you get provision
is computed as a percentage less
provision for doubtful debts is a
percentage of this and this is the
amount of debtors which will appear in
the balance sheet provision when it is
as a percentage of percentage of debtors
when provision for doubtful debts is a
percentage of debtors it is taken as a
percentage of the datas after charging
any bad debt any bad debt so this is how
it is reflected in the in the it is this
is how this is this is how provision for
doubtful debts is reflected in the
balance sheet it may be noted here that
while provision is created profit and
loss of
to provision for doubtful deaths if we
have an existing provision we have the
amount of new provision and we have bad
debts to be charged against this
provision then the amount which will
ultimately be transferred to profit and
loss account is new provision plus bad
debts less old provision less old
provision new provision plus bad debts -
old provision would give us the charge
to profit and losses would give us the
charge to profit
next sundry debtors of Messrs Sunni
brothers amounts to 25,000 and bad debts
3,000 they provide for doubtful deaths
at the rate of 2% past journal entries
and how is this shown in the balance so
that sundry debtors is 25,000 bad debts
are three thousand they provide for
doubtful debts at the rate of 2% so what
would be the journal entries first and
foremost that is a bad debt we could
take bad debt account debit to debtors
would be one entry amounting to 3,000
with the passing of this entry
the debtors of solo brothers is now
25,000 less three thousand twenty two
thousand they provide for doubtful
deaths at the rate of two percent to
provide for doubtful deaths the entry
would be Provost profit and loss account
debit to provision for doubtful deaths
at the rate of two percent of twenty of
twenty two thousand two percent of
twenty two thousand because the debtors
are not twenty five - three thousand
twenty two thousand this would be two
percent of twenty two thousand equal to
four hundred and forty how is this shown
in the balance sheet in the balance
sheet if these adjustments are made
later we would say this is in the
balance sheet and talk of only the asset
side we would say debtors total was
twenty five thousand less bad debts less
bad debts of three thousand giving us
22,000 less
provision for doubtfulness less
provision for doubtful deaths 440 the
amount of debtors to be shown would
therefore be twenty one thousand five
sixty this is how that there does would
appear on the asset side of the balance
sheet some creditors of messes Shakti
brothers amounts to one lakh three
thousand and bad debts to three thousand
they provide for doubtful deaths at the
rate of two percent there is an opening
balance of provision amounting to 3,500
past journal entries and how is this
shown in the balance sheet so in this
problem we have bad debts of three
thousand we have to provide for doubtful
debts at the rate of two percent and
there is an opening balance of provision
amounting to 3,500 we need to pass
journal entries and how its shown in the
balance sheet okay quickly rewrite the
workings here we have bad debts is equal
to three thousand our new provisions for
doubtful debts is equal to two percent
of what of debtors two percent of what
is that that is 1 lakh three thousand
but bad debts of three thousand would go
there for two percent of one lakh equal
to two thousand is the new promise and
up old provision for doubtful debts is
equal to three thousand five hundred
what are the accounting entries with
respect to all this first for bad debts
but that account debit to debtors bad
debt account debit to debtors we are
getting an amount of three thousand is
the amount of VAT debt and this by debt
people set off against the profit
for doubtful deaths since it exists so
we have actually bad debts of 3,000 we
have an opening prohibition of 3,500
once we offset that we will have a
balance of only 500 in the provision for
doubtful debts so how do you offset this
piece a provision for doubtful debts
account they wait to bad debts how much
an amount of 3,000 we had provision
3,500 now we have debited removed 3000
so that we have a balance now of only
500 we have a balance of 500 next we
have to create a new provision how much
is the provision we require we require
2,000 however we already have 500 so we
create a provision profit and loss
account debit to provision for doubtful
deaths of only 1500 of only 1,500 these
would be the journal entries actually
the amount here is if you notice it is
new provision that is 2,000 plus bad
debt - old provision 2,000 plus 3,000
that's 5,000 minus old provision of
3,500 or 1500 what would be the amount
to be shown in the balance sheet in the
balance sheet debtors 1 lakh 3000 less
by deaths he had 3000
less new provision for doubtful deaths
and himand of 2000 that is the balance
in the provision account 2000 is the
balance in the provision account this
will give us a balance of 98 thumbs this
is how it would appear in the balance so
we have bad debts we have set off the
bad debts against the old provision and
we have created a new provision to the
extent required the new provision the
ultimate balance in the provision
occurred at the end of the year had to
be 2000