Provision is the sum of amount set aside from profit and loss account.
It is created for known liability.
Provision amount is uncertain.
Provision is maintained to cover estimated loss or liabilities.
If previous provision is not sufficient, new provision is created from current year’s profit.
This provision should be created by debiting profit and loss account without consider whether the business is in profit or loss.
A provision is always created for specific purpose.
It is not for the distribution to shareholders.
In fact, provision reduces figure of profit but not figure of dividable profit.
Generally, provision is created for following purpose:
Provision for doubtful debts,
Provision for discount on debtors,
Provision for taxation,
Provision for repair and renewal etc.
Definition of provision |
“Provision is an amount set aside from profits for known liability.” |
There are two types of sales in the company.
They are goods sold in cash and goods sold on credit.
If goods are sold on credit, provision is crated.
Provision is maintained to cover estimated loss or liabilities.
When business provides credit facility, situation of a bad debts arise.
Provision for bad debts is deducted after bad debts.
These are deducted from debtors (bills receivable, account receivable).
Both bad debts and provision for bad debts are debited in profit and loss account.
Keep in Mind (KIM)
Other name of provision for bad debts (PBD): |
Reserve for doubtful debts, bad debts provision, reserve on debtors, provision on debtors, allowance for doubtful debts and allowance for uncollectable account. |
The terms reserves and provisions have been used as similar but there are differences between them.
The main differences are:
Bases |
Reserves |
Provisions |
Need |
It is created for unknown liabilities. |
It is created for meeting a definite liability. |
Based |
Reserve is created according to financial policy. |
It is based on expected future loss. |
Legality |
Creation of reserve is optional. |
Creation of a provision is usually compulsory. |
Availability |
Reserves are undivided profit and are available for distribution, if needed. |
Provisions are not available for distribution as undivided profits. |
Possibility |
Reserves are created only if profit available. |
Provisions can be created even in absence of profit. |
Purpose |
Reserves are created to strengthen the financial position of a business. |
Provisions are created keeping in consideration a specific liability or loss. |
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|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger |
|
Subsidiary Book |
|
Cash Book |
|
Trial Balance & Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
|
Depreciation |
|
Final Accounts: Class 11 |
|
Adjustment in Final Accounts |
|
Capital and Revenue |
|
Single Entry System |
|
Non-Trading Concern |
|
Government Accounting |
|
Goswara Voucher (Journal Voucher) |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
The following extracts information is provided from the book of A Trading Business:
Extracted Trial Balance on 31st December 2020
Particulars |
Amount Dr |
Amount Cr |
|
Sundry debtors |
150,000 |
|
|
Bad debts |
8,000 |
|
|
Provision for bad debts |
|
5,000 |
|
Additional information:
Provide 10% provision for doubtful debts.
Required: Provision for doubtful debts account
[Answer: P&L account = Rs 18,000]
SOLUTION:
Particulars |
Amount |
Particulars |
Amount |
To Bad debts (old) |
8,000 |
By Opening balance |
5,000 |
To Bad debts (new) |
Nil |
By P&L account (b/f) |
18,000 |
To Closing balance |
15,000 |
|
|
(150,000 – Nil) @ 10% |
|
|
|
|
23,000 |
|
23,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
The following extracts information is provided to you:
Extracted Trial Balance on 31st December 2020
Particulars |
Amount Dr |
Amount Cr |
|
Sundry debtors |
310,000 |
|
|
Bad debts |
18,000 |
|
|
Provision for bad debts |
|
22,000 |
|
Additional information:
Bad debts written off Rs 10,000 and provide 10% for provision for doubtful debts.
Required: Provision for doubtful debts account
[Answer: P&L account = Rs 36,000]
SOLUTION:
Particulars |
Amount |
Particulars |
Amount |
To Bad debts (old) |
18,000 |
By Opening balance |
22,000 |
To Bad debts (new) |
10,000 |
By P&L account (b/f) |
36,000 |
To Closing balance |
30,000 |
|
|
(310,000 – 10,000) @ 10% |
|
|
|
|
58,000 |
|
58,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
The following extracts information is provided you:
Extracted Trial Balance of SK Traders as on 31st December 2020
Particulars |
Debit Rs |
Credit Rs |
|
Sundry debtors |
6,00,000 |
− |
|
Net sales (all credit) |
− |
15,00,000 |
|
Provision for doubtful debts |
− |
9,000 |
|
Bad debts |
8,000 |
− |
|
Additional information:
Further bad debt estimated as 1% of credit sales.
Provision for bad debts is maintained 2% on sundry debtors.
Required: (a) Provision for doubtful debts account; (b) Show the amount in profit and loss account
[Answer: P&L account = Rs 26,000]
SOLUTION:
Provision for Doubtful Debts Account
Particulars |
Amount |
Particulars |
Amount |
To Bad debts, old |
8,000 |
By Balance b/d |
9,000 |
To Bad debts, new |
15,000 |
By P&L account (b/f) |
26,000 |
To Balance c/d (600,000 – Nil) @2% |
12,000 |
|
|
|
35,000 |
|
35,000 |
Profit and Loss Account
As on 31st December 2020
Particulars |
|
Amount |
Particulars |
Amount |
To Bad debts, old |
8,000 |
|
|
|
Add: New bad debts |
15,000 |
|
|
|
Add: PBD , new |
+ 12,000 |
|
|
|
|
35,000 |
|
|
|
Less: PBD, old |
(9,000) |
26,000 |
|
|
|
|
|
|
|
#####
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|
Accounting for Share |
|
Share in Nepali |
|
Debentures |
|
Final Accounts: Class 12 |
|
Final Accounts in Nepali |
|
Work Sheet |
|
Ratio Analysis (Accounting Ratio) |
|
Fund Flow Statement |
|
Cash Flow Statement |
|
Theory Accounting Xii |
|
Theory: Cost Accounting |
|
Cost Accounting |
|
LIFO−FIFO |
|
Cost Sheet, Unit Costing |
|
Cost Reconciliation Statement |
#####
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
MK Suppliers has following extracted information:
At the beginning of year, debtors have debit balance Rs 250,000.
Provision for doubtful debts was Rs 14,000 (Cr)
The company wrote-off Rs 5,000 as bad debts during the year.
Additional information:
Further bad debts Rs 10,000 and provision for bad debts was estimated is to be 5%.
Required: (a) Provision for doubtful account; (b) Necessary journal entries;
(c) Show the amounts in profit and loss account
[Answer: Profit and loss = Rs 13,000]
SOLUTION:
Provision for Doubtful Debts Account
Particulars |
Amount |
Particulars |
Amount |
To Bad debts, old |
5,000 |
By Balance b/d |
14,000 |
To Bad debts, new |
10,000 |
By P&L account (b/f) |
13,000* |
To Balance c/d |
12,000 |
|
|
(250,000 – 10,000)@5% |
|
|
|
|
27,000 |
|
27,000 |
Journal Entries
Date |
Particulars |
|
lF |
Debit Rs |
Credit Rs |
31 Dec |
Bad debts deducted from debtors |
|
|
|
|
|
Bad debts account |
Dr |
|
10,000 |
|
|
To Trade debtors account |
|
|
|
10,000 |
|
(Being- further bad debts provided on trade debtors) |
|
|
|
|
31 Dec |
PBD deducted from debtors (closing PBD) |
|
|
|
|
|
Provision for doubtful debts account |
Dr |
|
12,000 |
|
|
To Trade debtors account |
|
|
|
12,000 |
|
[Being- provision for doubtful debts maintained |
|
|
|
|
|
250,000 – 10,000) @ 5%] |
|
|
|
|
31 Dec |
Old + new bad debts transferred to PBD |
|
|
|
|
|
Provision for doubtful debts account |
Dr |
|
15,000 |
|
|
To Bad debts account |
|
|
|
15,000 |
|
(Being bad debts transferred to provision |
|
|
|
|
|
for doubtful debts 5,000 old + 10,000 new = Rs 15,000) |
|
|
|
|
31 Dec |
PBD transferred to P&L |
|
|
|
|
|
Profit and loss account |
Dr |
|
13,000* |
|
|
To Provision for doubtful debts account |
|
|
|
13,000 |
|
(Being PBD transferred to profit and loss account) |
|
|
|
|
|
|
|
|
|
|
Profit and Loss Account
As on 31st December 2020
Particulars |
|
Amount |
Particulars |
Amount |
To Bad debts, old |
5,000 |
|
|
|
Add: New bad debts |
10,000 |
|
|
|
Add: PBD , new |
+ 12,000 |
|
|
|
|
27,000 |
|
|
|
Less: PBD, old |
(14,000) |
13,000 |
|
|
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
The following extracted trial balance is provided by AVM Trading Concern on 31st December:
Particulars |
Amount Dr |
Amount Cr |
|
Trade debtors |
153,000 |
− |
|
Bad debts |
4,000 |
− |
|
Provision for bad debts |
|
7,500 |
|
Additional information:
Further bad debts Rs 3,000.
Create 10% provision for doubtful debts on remaining debtors.
Required: (a) Provision for doubtful debts account; (b) Necessary journal entries;
(c) Treatment of bad debts in Profit and loss account
(d) Show accounting of trade debtors in balance sheet
[Answer: Profit and loss = Rs 14,500]
SOLUTION:
Provision for Doubtful Debts Account
Particulars |
Amount |
Particulars |
Amount |
To Bad debts, old |
3,000 |
By Balance b/d |
7,500 |
To Bad debts, new |
4,000 |
By P&L account (b/f) |
14,500* |
To Balance c/d |
15,000 |
|
|
(153,000 – 3,000)@10% |
|
|
|
|
22,000 |
|
22,000 |
Journal Entries
Date |
Particulars |
|
lF |
Amount Dr |
Amount Cr |
31 Dec |
Bad debts deducted from trade debtors |
|
|
|
|
|
Bad debts account |
Dr |
|
3,000 |
|
|
To Trade debtors account |
|
|
|
3,000 |
|
(Being- further bad debts provided on trade debtors) |
|
|
|
|
31 Dec |
PBD deducted from trade debtors (closing PBD) |
|
|
|
|
|
Provision for doubtful debts account |
Dr |
|
15,000 |
|
|
To Trade debtors account |
|
|
|
15,000 |
|
[Being- provision for doubtful debts maintained |
|
|
|
|
|
153,000 – 3,000) @ 10%] |
|
|
|
|
31 Dec |
Old + new bad debts transferred to PBD |
|
|
|
|
|
Provision for doubtful debts account |
Dr |
|
7,000 |
|
|
To Bad debts account |
|
|
|
7,000 |
|
(Being bad debts transferred to provision for |
|
|
|
|
|
doubtful debts 4,000 old + 3,000 new = Rs 7,000) |
|
|
|
|
31 Dec |
PBD transferred to P&L |
|
|
|
|
|
Profit and loss account |
Dr |
|
14,500* |
|
|
To Provision for doubtful debts account |
|
|
|
14,500 |
|
(Being PBD transferred to profit and loss account) |
|
|
|
|
|
|
|
|
|
|
Profit and loss account
As on 31st December 2020
Particulars |
|
Amount |
Particulars |
Amount |
To Bad debts, old |
4,000 |
|
|
|
Add: New bad debts |
3,000 |
|
|
|
Add: PBD , new |
+ 15,000 |
|
|
|
|
22,000 |
|
|
|
Less: PBD, old |
(7,500) |
14,500 |
|
|
|
|
|
|
|
Balance Sheet
As on 31st December 2020
Liabilities |
Amount |
Assets |
|
Amount |
|
|
Trade debtors |
153,000 |
|
|
|
Less: Bad debts |
(3,000) |
|
|
|
|
150,000 |
|
|
|
Less: PBD 10% |
(15,000) |
135,000 |
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2F
AK Traders has following extracted information:
Bills receivable balance was Rs 100,000 and the balance in the.
Allowance for doubtful debts was Rs 2,000 (Cr).
Sales during the year were Rs 800,000 (80% on credit).
Rs 200,000 were collected during the year on-account of receivables.
The company has written-off Rs 5,000 as bad debts during the year.
Required: (a) Journal entries for sales, collections and bad debts write off during the year
(b) Journal entry for bad debts @ 5% on closing bills receivable.
Show the amounts of bills receivable in the balance sheet
[Answer: Closing bills receivable = Rs 535,000; Bad debts = Rs 26,750;
Balance sheet amount = Rs 508,250]
SOLUTION:
Credit sales = 800,000 @ 80% = Rs 640,000
Closing bills receivable |
= Opening balance + Credit sales – Cash received – Written off |
|
= 100,000 + 640,000 – 200,000 – 5,000 |
|
= Rs 535,000 |
Journal Entries
Date |
Particulars |
|
lF |
Amount Dr |
Amount Cr |
31 Dec |
For sales |
|
|
|
|
|
Cash account |
Dr |
|
160,000 |
|
|
Bills receivable account |
Dr |
|
640,000 |
|
|
To Sales account |
|
|
|
800,000 |
|
(Being- goods sold in cash and credit) |
|
|
|
|
31 Dec |
Cash collected from bills receivable |
|
|
|
|
|
Cash account |
Dr |
|
200,000 |
|
|
To Bills receivable account |
|
|
|
200,000 |
|
(Being- cash collected from bills receivable) |
|
|
|
|
31 Dec |
Bad debts written off |
|
|
|
|
|
Bad debts account |
Dr |
|
5,000 |
|
|
To Bills receivable account |
|
|
|
5,000 |
|
(Being bad debts written off on bills receivable) |
|
|
|
|
31 Dec |
Bad debts on credit sales |
|
|
|
|
|
Bad debts account |
Dr |
|
26,750* |
|
|
To Bills receivable account |
|
|
|
26,750 |
|
(Being- bad debts on credit sales Rs 535,000 @ 5% |
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Liabilities |
Amount |
Assets |
|
Amount |
|
|
Bills receivable |
535,000 |
|
|
|
Less: Bad debts |
(26,750) |
|
|
|
|
508,250 |
|
|
|
Less: PBD |
Nil |
508,250 |
|
|
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2G
The following extracts are for the year ended 31st December 2020:
Extracted Trial Balance
Particulars |
Amount Dr |
Amount Dr |
|
Sundry debtors |
50,000 |
|
|
Bad debts |
3,000 |
|
|
Provision for bad debts |
|
4,000 |
|
Additional information:
Bad debts for the current year are Rs 2,000.
Provision for bad debts @ 5% on debtors.
Discount on debtor is 2%
Required: Provision for bad debts account
[Answer: P&L account = Rs 4,312
Solution
Provision for Bad Debts Account
Particulars |
Amount Dr |
Particulars |
Amount Cr |
To Bad debts (old) |
3,000 |
By Opening balance |
4,000 |
To Bad debts (new) |
2,000 |
By P&L account (b/f) |
4,312 |
To Discount |
912* |
|
|
To Closing balance |
2,400 |
|
|
(50,000 – 2,000) @ 5% |
|
|
|
|
8,312 |
|
8,312 |
Discount = (50,000 Debtors ‒ 2,000 BD ‒ 2,400 PBD) @ 2% = Rs 912*
#####
PROBLEMS AND ANSWERS OF PROVISION FOR BAD DEBTS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
Following extracted information is given to you:
Opening provision for bad debts Rs 7,000.
Bad debts written off for the year Rs 15,000
Closing provision for bad debts Rs 3,000.
Required: Provision for bad debts account
[Answer: P&L account = Rs 11,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
Following extracted information is given to you:
Opening provision for bad debts Rs 6,000.
Bad debts written off for the year Rs 8,000
Reserve for doubtful debts 5% (debtors Rs 50,000)
Required: Provision for bad debts account
[Answer: P&L account = Rs 4,500]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
Following extracted information is given to you:
Extracted trial balance on 31st December 2020
Particulars |
Amount Dr |
Amount Cr |
Trade debtors |
90,000 |
− |
Bad debts |
5,000 |
− |
Provision for bad debts |
|
4,000 |
Additional information:
Create 10% provision for doubtful debts.
Required: Provision for doubtful debts account
[Answer: P&L account = Rs 10,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
Following extracted information is given to you:
Extracted trial balance on 31st December 2020
Particulars |
Amount Dr |
Amount Cr |
Book debts |
100,000 |
− |
Bad debts |
10,000 |
− |
Provision for bad debts |
|
8,000 |
Additional information:
Bad debts Rs 5,000 and provision for bad debts @ 2% on book debts
Required: Reserve for doubtful debts account
[Answer: P&L account = Rs 8,900]
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