Provisions | Provision for Doubtful Debts | Reserve for Doubtful Debts

 

 

Provisions

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.”

 

 

Provision for Doubtful Debts | Reserve for Doubtful Debts

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.

 

 

Difference between Reserves and Provisions

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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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 31^st 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:

Provision for Doubtful Debts Account

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 31^st 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:

Provision for Doubtful Debts Account

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 31^st 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 31^st 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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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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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*

 

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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 31^st 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 31^st 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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