Provision and reserves - class-XII

The balance in provision for bad debts is appearing in trial balance Rs.4000, of which bad debts of Rs.2000 is written off. Balance lying in provision account is now Rs.2000. It is desired to maintain a provision for bad debts of Rs.1000 only, hence an excess provision of Rs.1000 to be written back to profit & loss account by crediting the profit & loss a/c. 

A provision is recorded in a liability account, which is typically classified on the balance sheet as a current liability.

Provision for discount on debtors is calculated on the net amount of debtors, which is the total debtors minus the provision for doubtful debts.

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. Later, when you identify a specific customer invoice that is not going to be paid, eliminate it against the provision for doubtful debts.

Option B is correct one.

The provision for income taxes on an income statement is the amount of income taxes a company estimates it will pay in a given year.In the Balance sheet of bank it shown under the head other Liabilities and Provission.

A provision is an amount that you put in aside in your accounts to cover a future liability.

The purpose of a provision is to make a current year’s balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year. These costs that distinctly belong to a specific year could be misleading if accounted for in the future.
A provision is not a form of saving, even though it is an amount that is put aside for a future possible cost or obligation. Provisions resulting impact is a reduction in the company's equity.
When accounting, provisions are recognized on the balance sheet and then expensed on the income statement.

A provision for anticipated expenditure is to be disclosed under the head 'current liabilities and provisions' whereas a provision for an anticipated loss (provision for doubtful debts) is to be shown as a deduction from the asset which is likely to result in a loss.

Amount which is not recoverable from the debtors is called bad debts. Bad debts is a loss for the organization and should be debited to profit & loss account. Following journal entry will be passed:

Provisions are created against the anticipated losses or for the expenses which are due but not paid. 

The term provision refers to any of the following amounts :

Option C is correct. A debtor is a person that owes money to business due to sale of goods or services on credit. Doubtful debts are those debtors that might become a bad debt in future. 

Bad Debt is a debt which is not collectible and is worthless to the Creditor. It is usually a product of the debtor which has gone for bankruptcy. Bad Debts can also occur when the collection cost is more than the amount of the debt.

Provision is shown either on assets side by way of deduction from the respective asset in relation to which it has been created or on the liabilities side under the sub-head 'Provisions'

Solution to the given problem is as under:

Solution to the given problem is given below:

Option A is correct one.

Provision for Doubtful Debts means the expense reported on the income statement or profit and loss A/c. If Provision for Doubtful Debts is the current period expense associated with the losses from normal credit sales, it will appear as an operating expense usually as part of Selling, General and Administrative Expenses (SG&A). If a provision for doubtful debts would decrease then debit balance of profit and loss A/c would decrease and ultimately net profit would increase.

New provision = 300000*5/100 = 15000
Old provision = 5000

simple reason that out of the credit sales made during the particular year, some debts are likely to become bad in the next year due to non- payments. The correct accounting is to make provision for such likely bad debts every year 

The amount to be debited to the P&L account is the new provision (1,800) plus the actual discount allowed (1,500), minus the old provision (1,100). Calculation: 1,800 + 1,500 - 1,100 = 2,200.

To create or increase a provision for discount on debtors, the Profit & Loss account is debited and the Provision for Discount on Debtors account is credited.

The provision for doubtful debts is calculated as 5% of 40,000, which is 2,000. The entry to create this provision is to debit the Profit & Loss account and credit the Provision for Doubtful Debts account.

Joint stock companies are legally required by the Companies Act to provide for depreciation on their fixed assets before declaring dividends.

In the balance sheet, the new provision for doubtful debts (the current year's provision) is the amount deducted from the sundry debtors.

When using an accumulated provision for depreciation account, the depreciation expense is debited to the Profit and Loss account and credited to the Provision for Depreciation account.

A provision for bad debts is a contra-asset account, not a liability. It is an estimate of uncollectible accounts and is not owed to the proprietor, making statement B the incorrect one.

Provision for Discount on Creditors. When the business makes prompt payments of its debts, it is bound to receive Discounts from its creditors.  A Provision for such discount is made in the current year itself so that that the discounts thus earned may be credited to the Profit and Loss Account of the current year.

Provision for depreciation means wherein the depreciation of an asset is accumulated in a different account called provision for depreciation. 

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. Later, when you identify a specific customer invoice that is not going to be paid, eliminate it against the provision for doubtful debts.

In other words, the amount of the provision for discount is calculated after deducting bad debts and provision for doubtful debts from sundry debtors. Suppose, sundry debtors total Rs. 20, 000; provision for doubtful debts is required at 5% and provision for discounts at 2 ½ %.

Credit sales are debited to the individual debtors account and credited to sales account. 

Provision for doubtful debt is created for the anticipated loss due to non recovery of the debtors amount. It is a charge to the profit & loss account. 

Provisions are created for anticipated or estimated future losses or against the expenses which are due but not paid. 

A provision is an amount that you put in aside in your accounts to cover a future liability.
The purpose of a provision is to make a current year’s balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year. These costs that distinctly belong to a specific year could be misleading if accounted for in the future.
A provision is not a form of saving, even though it is an amount that is put aside for a future plausible cost or obligation. Provisions resulting impact is a reduction in the company's equity.
When accounting, provisions are recognized on the balance sheet and then expensed on the income statement.

Provision can be created for any of the foloowing:

1. Current assets

2. Liabilities and assets

3. Valuation adjustment for fixed asset

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Amount which is not recoverable from the debtors is called bad debts. Bad debts has to be debited as an expense/loss and credited to sundry debtors account. 

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Distribution of Profits against a reserve head to meet future needs are called appropriations. Eg. General Reserve, Revenue Reserve. 

Reserves & surplus fund is created out of profits that are to be shared between the partners or share holders. Therefore fund created out of profit is a liability to the company and can be created only after the calculation of profit. Reserves & Surplus fund is created to meet future contingencies. If the contingency does not arise as expected this fund can be distributed among partners or distributed as dividends among shareholders. It can be used for issuing bonus shares. The decision how to make use of the funds will be done by the partners or in the case of a company in the AGM. 

Since reserves are neither expenses nor losses, so these are not charged to profit & loss Account rather these are debited to Profit & Loss Appropriation Account which is prepared after Profit and Loss Account.