Provision for Discount on Debtors

Meaning of Provision for Discount on Debtors Account

Lecture Session

In accounting, provision for discount on debtors shows the reserve amount for adjusting loss due to discount allowed to our debtors. Every businessman wants to get money faster from their customer. So, businessman accepts less money than actual from those customers who will pay before maturity of debt. So, at the end of year, we make provision for next year losses due to discount allowed. So, these provision will be called provision for discount on debtors. These provision is made on the basis of past experience with customers. We will not use this money which has been kept out of profit and will use for purchasing new material in case our loss of discount allowed will happen. This provision may be 1 % to 10%  of net debtors.

We will show provision for discount on debtors in profit and loss account and balance sheet. Many students are still confused which amount of provision for discount on debtor will be shown in profit and loss account and balance sheet. According to question, there may be different situation but best procedure is to make provision for discount on debtors account and new provision of this year will be deducted out of gross debtors in balance sheet and balancing figure of provision for discount on debtors account will be shown in the debit side of profit and loss account.

I can explain you with a very simple example

suppose your trial balance showing Rs. 5 as provision for discount on debtors account in the credit side. Your trial balance also showing bad debts of Rs. 15 and discount allowed of Rs. 10 and debtors Rs. 100. Outside of trial balance there are following adjustments.

a) provision for bad debts 10%
b) bad debts Rs. 10
c) provision for discount on debtors.

Make provision for discount on debtor account and show these adjustments in final accounts.

provision for discount on debtors account

Credit side

1. provision for discount on debtor account Rs. 5
2. Difference of Debit side and credit side will go to profit and loss account  Rs. 9

Debit side

1. discount allowed Rs. 10

2. New provision for discount on debtors  Rs. 4

working note
debtors 100
less new bad debts 10
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balance 90
less new provision for bad debts 10% on 90 = 9

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balance 81
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new provision of 5% on 81 = 4

Adjustment in Profit and loss account

In profit and loss account's debit side, we will show only provision for discount account with Rs. 9
( Note, we will not show discount allowed )

Adjustment in balance sheet

In balance sheet's asset side, we show only net debtors amount

Balance debtors Rs. 81

minus new provision for discount on debtors Rs. 4

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Net debtors  = Rs. 77

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Related : Provision for Doubtful Debts Account