Question 2: What is meant by provision for doubtful debts? How are the relevant accounts prepared and what journal entries are recorded in final accounts? How is the amount for provision for doubtful debts calculated?
Answer:
Provision for doubtful debts is a kind of arrangement about the expected bad debts from the debtors. Generally it is provided after deducting the amount of bad debts from the debtors. In other words provision is made only on good debtors those who have already proven bad, there is no need to make any provision on that. As provision for doubtful debts is made after preparing the trial balance, to record it we need a kind of adjustment entry in this regard we prepare debtors account and provision for doubtful debts account. For recording bad debts, the following journal entry is passed:
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
(Being provision for doubtful debts is created out of current year profits)
Computation of the Amount of Provision for Doubtful Debts As it is given at the end of a trial balance as an adjustment, little other related adjustment may be there for instance bad debts and discount on debtors. In this case provision for doubtful debt will be created after deducting the figure for bad debts out of the debtor figure.
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