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PROVISION FOR BAD AND DOUBTFUL DEBTS (GIVEN IN THE TRIAL BALANCE)

We maintain provision for bad and doubtful debts every year. Provision maintained is the amount likely to prove bad. It is not the actual bad debts. If bad debts are lesser than the amount of provision for bad and doubtful debts, there will remain a credit balance in the provision for bad and doubtful debts account. The amount will appear in the trial balance, so it will be shown at one place only. It will be either shown at the credit side of profit and loss account or it will be deducted from the total of bad debts, further bad debts and new provision at the debit side of profit and loss account. It may also be shown at the liability side. Only one of the three treatments will be made.

Calculation of provision for bad and doubtful debts

Provision for bad and doubtful debts is calculated on sundry debtors at given rate. In certain cases, there are further bad debts in the adjustments and the provision is also to be calculated at certain rate. In these cases, provision for bad and doubtful debts will be calculated on debtors after deducting the amount of bad debts or further bad debts (given in the adjustment).

Calculation is explained as under.

Illustration 1. Calculate provision for bad debts in the following cases:

(a) Create or maintain or make provision for bad and doubtful debts @ 7%.

(b)        (i) There was a further bad debts of $ 350.

(ii) Create reserve for bad and doubtful debts @ 7%.

The balance of the sundry debtors as per Trial balance is $ 50,000 in both the cases.

 

Solution. (a) Provision for bad and doubtful debts= 50,000 x7/100 = $ 3,500.

(b) $ 350 have proved to be bad debts, so the amount due from debtors will reduce by $350 and it is actually 50,000- 350 = $ 49,650. Now, the provision will be made on $ 49, 650 not on $ 50,000 .

Provision for bad and doubtful debts =49,650×7/ 100

= $ 3,475.50.