Bad debts and provisions

Debts are dealt with in a fixed order: further bad debts first, then the provision for doubtful debts, then the provision for discount.

Further bad debts are debts found to be lost after the trial balance was made. Entry: Bad Debts A/c Dr, To Debtors A/c. Add them to the bad debts already in the trial balance, and deduct them from debtors in the balance sheet.

Provision for doubtful debts is a percentage of the debtors left after the further bad debts. Entry: Profit and Loss A/c Dr, To Provision for Doubtful Debts A/c. In the balance sheet it is shown as a deduction from debtors, not as a liability.

Most years there is already an old provision from last year in the trial balance. This year's bad debts are set against it, and the profit and loss account bears only the difference:

Charge = Bad debts + Further bad debts + New provision − Old provision. On page 333 of the book: 2,000 + 1,000 + 1,550 − 3,500 = ₹1,050, debited to profit and loss. If the old provision is more than enough, the answer is negative and the excess is credited to profit and loss instead. Only the new provision appears in the closing balance sheet; the old one has been used up.

Some firms also allow customers a discount for paying quickly. A provision for discount on debtors is made on the good debtors only: debtors after further bad debts and after the provision for doubtful debts. In the book, Ankit's debtors of ₹15,500 less further bad debts of ₹2,500 leave ₹13,000; then a provision for doubtful debts of ₹650; then the discount provision on what is left.