Question

Create R.D.D. at 5% on sundry debtors.

Answer 1

Answer:

Discount is allowed when our Debtors settle their accounts promptly. If the Debtors of the cur­rent period settle their accounts promptly in the succeeding period, discount will have to be allowed by us.

The amount of discount is an expected loss and a provision has to be made for it in the Final Accounts of the current year. The Accounting procedure for this provision is similar to that of Provi­sion for Doubtful Debts discussed above. So, the discount that might be allowed on debts whose debts fall in the succeeding year is estimated.

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The adjusting entry is:

Adjusting Entry

The discount payable on Debtors is only a contingent loss and not a loss already incurred. The discount is to be given only to those Debtors who make prompt payment, thus the amount of provi­sion for Discount on Debtors is to be calculated on good debts. The Account-Provision for Discount on Debtors is carried forward next year. By doing so, Profit and Loss Account and Balance Sheet disclose true financial position.

When discount is allowed, the entry is:

Entry When Discount is Allowed

At the end of accounting year, the firm also estimates the amount of discount which it may have to give to the Debtors outstanding at the end of the accounting period in the course of next year.

This is done by creating a Provision for Discount on Debtors and journal entry is:

Entry- Provision for Discount on Debtors

Discount is allowed to prompt Debtors, but not too bad and doubtful debtors. Therefore, before making the Provision for Discount, the amount of Bad and Doubtful Debtors must first be estimated and deducted from the amount of Debtors as per the ledger on the balance of Debtors, i.e. on the good debtors only, the Provision for Discount on Debtors must be created.

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The double effect of Provision for Discount on Debtors is:

1. It is shown on the debit side of Profit and Loss Account.

2. It is shown as deduction from Debtors in Balance Sheet. But remember the amount of Provision is calculated only after deducting the amount of additional Bad Debts.

Explanation:

Answer 2

Answer:

Explanation:Maintain R.D.D. at 5% on sundry debtors.