CBSE Class 11-commerce Answered

• It is the provision created by the firm for the amount of likely bad debts at the end of the accounting year. This is done in order to comply with the Convention of Conservatism or Prudence Concept which requires that the amount of expected losses are provided while expected incomes are not to be recorded.

• Entry to be passed for creating provision is as follows: 

                 Profit and Loss A/c                        …Dr.

                      To Provision for Doubtful Debts A/c

             (Being the provision made for doubtful debts)

• The amount of Provisions debited to the Profit and Loss Account reduces the current year’s profit with the amount of provision and the same is carried forward to the next year. In the next year, on the occurrence of bad debts these are written off with the amount of available provisions. While writing off, the amount of Bad Debts is debited to Provision for Doubtful Debts Account, the amount of bad debts here are not debited to the Profit and Loss Account since it was already debited in the earlier years.

• It is to be noted that such provision amount is deducted from the amount of book debts in the Balance Sheet but the two accounts are maintained separately and therefore, balance of Sundry Debtor’s or Customer’s Account is not affected by making the Provision for Doubtful Debts.

• Following are the important points to be noted:
  • The amount of such provision given on the credit side of the Trial Balance is known as an old provision for accounting purposes.
  • The additional amount of provision made for the current year is known as new provision.
  • The amount of bad debts given outside the Trial Balance are known as further bad debts. Such further bad debts are first deducted from the debtors for calculating Provision for Doubtful Debts. This is because the Provision for Doubtful Debts is created only on doubtful debts and not on Bad Debts.
  • The amounts of bad debts and new provision for doubtful debts are deducted from the Sundry Debtors on the asset side of the Balance Sheet.