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