What are ‘provisions’. How are they created? Give accounting treatment in
case of provision for doubtful Debts.
Answers
Provisions refers to the arrangement for some particular kinds of losses or expenses. They are created by the traders of the companies.
Explanation:
Meaning of provisions: It refers to the arrangement for some particular kinds of losses or expenses. These expenses are associated to the current period of accounting but they are not incurred yet. It is important to create these provisions in order to ascertain true amount of the net profit.
The way by which they are created are as follows:
They are created by the traders of the companies in order to take care about expected losses during realization. They are created by the person who manages different types of provisions.
Some examples are:
i. Provision for repairs
ii. provision for depreciation
iii. Provision for bad debts
The accounting treatment for the provision for doubtful debts is-
Primarily, the amount of bad debts has to be ascertained that is posted on the debit column of profit and loss account as a newly created provision for the doubtful debts, it has to shown on the credit column in the same account. After doing so, the amount of new provision has to be deducted from the assets column of the balance sheet.