Question -
Answer -
In an ideal scenario, it is expected that debtors will be paying all the amount owed by them to the business, in reality it doesn’t happen as some debtors might default on paying. It can be the full amount or a part of the sum borrowed. It is uncertain as to how much will that debt actually becomes bad debt. A business has to make a reasonable estimate for such an event. This estimate is called as provision for bad debts. It is created by debiting P & L account.
Profit and Loss A/c Dr
To Provision for doubtful debts A/c
Provision for doubtful debts is shown as deduction from debtors on asset side of balance sheet. It presents a true and fair view of business. Provision for doubtful debts created at the end of the accounting period is carried forward to the next accounting period.
Adjustment entries for the provision for doubtful debts
Profit and Loss Account
| Expenses/Losses | Amount ₹ | Revenues/Gains | Amount ₹ |
| Provision for doubtful debts | | | |
| Bad debts | | | |
| Further bad debts | | | |
| New provision | | | |
| Less: Old Provision | | | |
BalanceSheet
| Liabilities | Amount ₹ | Assets | Amount ₹ |
| | Sundry debtors | |
| | Less: Further bad debts | |
| | Less: Provision for doubtful debts | |
| | | |