Note on Provisions

  • Note
  • Things to remember

INTRODUCTION

Provision indicates to any amount of anticipated losses or expenses of the business in the future due to current year’s activities. It is created for particular purpose by charging against the profit and loss account. The provision can be created in the organization for:

  • Liability and charges (e.g. provision for tax)
  • Valuation adjustment for fixed assets (e.g. provision for depreciation)
  • Current assets (provision for doubtful debt)

Provision may be both specific or general. If the provision is made for a particular debtor that is considered as specific provision and if provision made as a percentage of the debtors that is considered as general provision.

Features of provision



The features of provision are as follows:

  • It is created for specific purpose.
  • It is charged against profit.
  • It is created for expected contingencies.
  • It is charged to Profit and Loss Account.

Objectives of provision

The objectives of provision are as follows:

  • To cover future losses in the value of assets or expenses.
  • To meet the anticipated losses and liabilities.
  • To know the true profit and loss of the firm.
  • To meet the anticipated losses and liabilities.

Provision for Bad and Doubtful Debts



Provision for doubtful debts is the estimated amount amount of bad debt that arises from account receivable that have been issued but not collected yet. In other words, doubtful debt is the amount of account receivable that might become a bad debt in near future.

Provision for doubtful debt is created to meet any future potential loss, due to non-payment the whole or part of the debt owing by the debtors. It is an expected loss for the concern.

Provision for doubtful debts is posted at the debit side of profit & loss account. This provision for doubtful debts is also deducted from sundry debtors on the assets side of the balance sheet.

Journal Entries for Bad and Doubtful Debt

Particulars

L.F

Dr.

Cr.

A) For doubtful debt (new provision) [Sundry debtors ×Rate]
Profit and Loss a/c………………………………………….Dr
To Provision for doubtful debt a/c
(Being Provision for doubtful debt created @........% on debtors)


XXX



XXX

B) For further bad debt [Given in additional information]
Bad debt a/c……………………………………………………Dr
To Sundry debtor a/c
(Being further bad debt written off)


XXX



XXX

C) For transferring total bad debt to provision for bad and doubtful debt a/c [Bad debt + Further bad debt]
Provision for doubtful debt a/c…………………………………….Dr
To Bad debt a/c
(Being total bad debt transferred to provision for bad and doubtful debt a/c)



XXX




XXX

D) For transferring the provision for doubtful debt to profit and loss account [Bad debt + New provision – Old provision]
Profit and loss a/c……………………………………..Dr
To Provision for doubtful debt a/c
(Being provision for doubtful debt transferred to debit side of P/L a/c)



XXX




XXX

E) If Old provision is greater than bad debt and new provision [Old provision – Bad debt – New provision]
Provision for doubtful debt a/c………………………..Dr
To Profit and loss a/c
(Being provision for doubtful debt transferred to credit side of P/L a/c)



XXX




XXX

Necessary Ledger Accounts

1. Bad Debt Account

Date

Particulars

J.F.

Dr.

Date

Particulars

J.F.

Cr.

End

To Balance b/d (As per debit side of trial balance)
To Debtors a/c
(further bad debt)

XX

XX

End

By Provision for doubtful debt a/c

XX

XXX

XXX

2. Provision for Bad and Doubtful Debt Account

Date

Particulars

J.F.

Dr.

Date

Particulars

J.F.

Cr.

End

ToBad debt a/c (As per debit side of trial balance)
To Profit and Loss a/c
(Balancing figure –if)
To Balance c/d

XX

XX

XX

End

By Balance b/d (Old provision as per credit side of trial balance)
By Profit and Loss a/c
(Balancing figure- if)

XX


XX

XXX

XXX

  • Effect of Provision for Bad Debt on Profit and Loss Account

Profit and Loss Account
(If old provision is lower than bad debt and new provision)

Date

Particulars

J.F.

Dr.

Date

Particulars

J.F.

Cr.

End

To Provision for doubtful debt a/c
Bad debt XX
Add: New provision XX
Less: Old provision XX





XX


Profit and Loss Account
(If old provision is higher than bad debt and new provision)

Date

Particulars

J.F.

Dr.

Date

Particulars

J.F.

Cr.

End

By Provision for doubtful debt a/c
Old provision XX
Less: Bad debt XX
Less New Provision XX





XX

  • Effect of Provision for bad debt on Balance sheet

Balance Sheet

Liabilities and Capital

Amount

Assets

Amount

Sundry debtors XX
Less: Further bad debt XX
Less: New provision XX



XX

Difference between Provision and Reserve

Basis of distinction

Provision

Reserve

Meaning

It means any amount written off by the way of depreciation, renewal in value of assets.

It is part of profit retained for future contingencies.

Purpose

It is created for particular purpose & can only be used for that particular purpose.

It need not necessarily be created for particular purpose e.g. General reserve, contingencies.

Charge Vs. Appropriation

It is charged against profit & is required to be created irrespective of the amount of profit.

It is an appropriation of profit & can be created only if profit has been earned.

Disclosure in balance sheet

Usually a provision is shown by way of deduction from the amount of the items which it is created e.g. provision for doubtful debt.

It is shown as a separate item under the head reserve & surplus on the liabilities side of B/S.

Utilization for dividend

It can’t be utilized for distribution by way of dividend.

It can be utilized for distribution by way of dividend.

Examples

Provision for tax, provision for doubtful debt, etc.

General reserve, contingency reserve, etc.




References:

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan, Kathmandu

 The provision can be created in the organization for:

  1. Liability and charges (e.g. provision for tax)
  2. Valuation adjustment for fixed assets (e.g. provision for depreciation)
  3. Current assets (provision for doubtful debt)
.

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