Before doing accounting treatment of provision for doubtful debts , you must know the complete definition of provision . In accounting , it is a reserve that is against loss due to non payment of debtors . In case debtor does not give us our amount . Then if we have make provision or reserve for this , we can easily purchase new goods but if we have no money due to every year bad debts then we can become insolvent . So with our work experience we should make our provision on our debtors with some % on debtor .
Now you are ready for doing the accounting treatment of provision for doubtful debts .
First of pass the journal entry of actual bad debts .
Entry for recording actual bad debt which did not record in books of business
1. Bad debts account Dr. xxxxx
To Sundry Debtors Account xxxxxx
Entry for transferring bad debts to provision for bad debts Account
2. Provision for bad debts account Dr. xxxxxx
To Bad Debts account xxxxx
Transfer of provision for bad debts account to profit and loss account
3. Profit and loss account Dr. xxxxxx
To Provision for bad debts account xxxxx
It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it may go to the credit side . It will decide after making provision for doubtful debt account . Which is very easy to make . I am showing you this account . After study of this account you can easily make this account and take the benefits of this provision .
Now you are ready for doing the accounting treatment of provision for doubtful debts .
First of pass the journal entry of actual bad debts .
Entry for recording actual bad debt which did not record in books of business
1. Bad debts account Dr. xxxxx
To Sundry Debtors Account xxxxxx
Entry for transferring bad debts to provision for bad debts Account
2. Provision for bad debts account Dr. xxxxxx
To Bad Debts account xxxxx
Transfer of provision for bad debts account to profit and loss account
3. Profit and loss account Dr. xxxxxx
To Provision for bad debts account xxxxx
It is not necessary that provision for doubtful debt account will go only to the debit side of this account but it may go to the credit side . It will decide after making provision for doubtful debt account . Which is very easy to make . I am showing you this account . After study of this account you can easily make this account and take the benefits of this provision .
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ReplyDeletethnx
ReplyDeleteThanx it helped
ReplyDeleteThank you:)
ReplyDeleteWhen will it provision comes to credit side
ReplyDeleteProvision should have credit balance whereas in the above journal entry which I am re writing below, shows debit balance, how is this so?
ReplyDeleteProvision for bad debts
To bad debts
Should not the journal entry be:
Sundry debtors
To provision for bad debts
And at end of the year it has to be:
Profit and loss
To sundry debtors
read the post's journal entry in this sequence- 3-1-2..
Deleteyou first have to create a provision..then u have to record the actual bad debt...then u have to use the provision for the amount of actual bad debt
Mayur I think you are right but the journal entry should be:
ReplyDelete1) while creating provision for bad debts:
Sundry debtors A/c Dr (As asset as debit balance)
To provision for bad debts A/c (AS liabi has credit bal)
2) When actual bad debt occurs:
Bad debts A/c (As expense has debit balance)
To Sundry debtor (Decrease in asset is a credit balance)
So the final entry after cancelling the 1st and 2nd journal entry would be:
Bad debts A/c Dr
To Provision for bad debts A/c
Am I Right?
there is one more closing entry
ReplyDeleteProvision for bad and doubtful debts A/c Dr.
To sundry debtors