Theory question 101
Bad Debts and ProvisionsExplain the following items and outline how they are treated in the final accounts: (a) increase in provision for doubtful debts; (b) decrease in provision for doubtful debts; (c) provision for discount on debtors; (d) provision for discount on creditors; (e) provision for depreciation.
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(a) Increase in provision for doubtful debts: the extra amount set aside because more debts are expected to go bad. Debit profit and loss; the full new provision is deducted from debtors in the balance sheet.
(b) Decrease: the provision needed is lower than last year. Credit profit and loss with the reduction; the new lower provision is deducted from debtors.
(c) Provision for discount on debtors: estimate of cash discounts debtors will take (on debtors after the doubtful debts provision). Debit profit and loss; deduct from debtors in the balance sheet.
(d) Provision for discount on creditors: estimate of discount the business will receive from suppliers. Credit profit and loss; deduct from creditors in the balance sheet.
(e) Provision for depreciation: the part of a fixed asset's cost used up through wear, use and time. The year's charge is debited to profit and loss; the accumulated provision is deducted from the asset's cost in the balance sheet.
For each: what it is, the profit and loss entry, and the balance sheet treatment.