Question

Why is provision for doubtful debt created? How is it shown in the balance sheet? Explain

Answer 1

The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. It is identical to the allowance for doubtful accounts. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be uncollectible. Thus, the net impact of the provision for doubtful debts is to accelerate the recognition of bad debts into earlier reporting periods.

A business typically estimates the amount of bad debt based on historical experience, and charges this amount to expense with a debit to the bad debt expense account (which appears in the income statement) and a credit to the provision for doubtful debts account (which appears in the balance sheet). The organization should make this entry in the same period when it bills a customer, so that revenues are matched with all applicable expenses (as per the matching principle).

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Answer 2

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The doubtful debt reserve holds a sum of money to allow a reduction in the accounts receivable ledger due to non-collection of debts. This can also be referred to as an allowance for bad debts. Once a doubtful debt becomes uncollectable, the amount will be written off.

Provision for doubtful debt is a expected loss which may be arises due to difference in book value of debt (debtor) or realisable value of debt.

It help to show real value of debtor (asset) as on balance sheet date.

Further Provision relate to Assets is covered by Accounting standard -4 , Contingencies and event occurring after balance sheet date. (You may refer the same for dept knowledge)

Presentation in balance sheet

Provision for doubtful shown by deducting from gross Trade receivable.

Illustration :-

Notes to Accounts

Note No xxx Trade recevable

Aggregate amount outstanding. xxx for period more than 180 days.

Less : Provision for doubtful debt. (xxx). xxx.

2. Other. xxx

Less : Provision for doubtful debt. (xxx). xxx

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