Above problem has been asked from Wellington, New Zealand. Before getting your answer, please read basics of provision and provision for doubtful debt .
Provision for doubtful debt represents the amount of estimated reserve fund of loss due to not receiving money from debtors. This amount is deducted in balance sheet for showing correct current asset position of company. Excess of new provision over old provision will be debited to profit and loss account. If we decrease the provision for doubtful debt from its actual estimation, then following things may happen :
1. If we keep provision for doubtful debt less than its real value, our balance sheet will not show correct current asset position.
2. If bad debts happens in reality, then less fund collected with provision for doubtful debt will not cover the loss and we may face difficulty for buying new raw material for production.
3. Provision for doubtful debt is just like reserve fund out of profit which is not distributed to shareholders of company, if we decrease it, it means we are reducing reserve fund and it will affect adversely to the working capital of company.
4. If we reduce the provision for doubtful debt after deep analysis the estimated bad debts, it will be helpful for business, because we can use maximum profit for development of business without keeping it just in reserve form.
Provision for doubtful debt represents the amount of estimated reserve fund of loss due to not receiving money from debtors. This amount is deducted in balance sheet for showing correct current asset position of company. Excess of new provision over old provision will be debited to profit and loss account. If we decrease the provision for doubtful debt from its actual estimation, then following things may happen :
1. If we keep provision for doubtful debt less than its real value, our balance sheet will not show correct current asset position.
2. If bad debts happens in reality, then less fund collected with provision for doubtful debt will not cover the loss and we may face difficulty for buying new raw material for production.
3. Provision for doubtful debt is just like reserve fund out of profit which is not distributed to shareholders of company, if we decrease it, it means we are reducing reserve fund and it will affect adversely to the working capital of company.
4. If we reduce the provision for doubtful debt after deep analysis the estimated bad debts, it will be helpful for business, because we can use maximum profit for development of business without keeping it just in reserve form.
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