USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

PROVISION FOR DISCOUNT ON DEBTORS

It is common practice of the business to allow its debtors, cash discount, so that they may be encouraged to make early and immediate payment. Discount is allowed to debtors. We shall be receiving lesser amount from debtors after allowing them discount. It is, therefore, a loss and debited to profit and loss account. If discount allowed appears in the Trial balance, it will be shown at debit side of Profit and loss account only. It may be noted that provision for discount on debtors is made only on good debtors.

We may be asked to make a provision for discount on debtors in the adjustment. In this case, discount on debtors will be calculated at the given rate on debtors. It will be shown at the debit side of profit and loss account and also deducted from debtors at the assets side of Balance sheet.

Calculation of discount on debtors. Discount on debtors is allowed to only those debtors, who are going to make us payment. It means that it will exclude those debtors, who have become bad and also those who are doubtful. Suppose we have been given further bad debts, and asked to create a provision for bad and doubtful debts in addition to discount on debtors. We shall deduct the amount of further bad debts from debtors to calculate provision for bad and doubtful debts. Discount on debtors will be calculated after deducting further bad debts and provision for doubtful debts both from debtors.

If we are asked to create a provision for bad and doubtful debts and also discount on debtors. we shall calculate provision for doubtful debts first, deduct its amount from debtors and calculate discount on debtors on deducted amount of debtors. Calculation and treatment of discount on debtors is illustrated herewith.

Relationship between bad debts and provision for bad debts

Bad debts and bad debts provision are inter-related and interdependent. Bad debts provision is maintained to meet the loss due to bad debts. This is why bad debts account is closed by transfer to profit and loss account. Provision for bad debts account shows the amount to be charged out of profit and loss account. The balancing figure of this account is transferred to profit and loss account. Maintenance of these accounts has been illustrated as under: