Fundamentals of Financial and Cost Accounting · Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Provision for Discount on Debtors: Calculation and Entries

Updated 10 October 2026 · Fact-checked

A provision for discount on debtors is an amount set aside to cover the cash discount you expect to allow when debtors pay on time. You calculate it on good debtors only: debtors less bad debts less provision for doubtful debts. Then you debit Profit and Loss and credit the provision account.

Understand Provision for Discount on Debtors

When you sell on credit, you may offer a cash discount if the customer pays early. The discount is allowed only when the money is received. But the debtors on your balance sheet date will probably claim discount next year. The expense belongs to the year of the sale, not the year of payment.

So at the year end you create a provision for discount on debtors. It is a charge against profit, and it matches the expected discount with the sales that caused it. It follows the prudence idea: provide for likely losses.

Why calculate on good debtors only? A debtor who will never pay will not get a discount. A doubtful debtor is already covered by the provision for doubtful debts. Only the remaining debtors are expected to pay and claim discount.

The order of the adjustments therefore matters. First write off actual bad debts. Then create the provision for doubtful debts. Then create the provision for discount on what is left.

In the balance sheet, the provision is deducted from sundry debtors, along with the provision for doubtful debts. Only the change in the provision is charged to Profit and Loss each year.

Key formulas to remember

Base for discount provision: Good debtors = Debtors − Bad debts − Provision for doubtful debts; Use closing debtors after adjusting for the bad debts given in the question.
Provision for discount: Provision = Good debtors × Rate of discount ÷ 100; Rate is given as a percentage of the good debtors.
Charge to Profit and Loss: Charge = New provision − Old provision (if new is higher); If new is lower, the difference is a gain, credited to Profit and Loss.
Entry to create or increase: Profit and Loss A/c Dr. ; To Provision for Discount on Debtors A/c; Pass for the amount of the increase only.
Entry to reduce: Provision for Discount on Debtors A/c Dr. ; To Profit and Loss A/c; Pass for the amount of the decrease.

How to solve Provision for Discount on Debtors questions

Follow this order for any question on provision for discount on debtors. The order of deductions decides the answer.

1Note the debtors figure given in the trial balance, and check whether it is before or after any adjustment.
2Deduct the further bad debts given in the adjustments.
3Calculate the provision for doubtful debts on the figure after bad debts, using the given rate.
4Deduct that provision from the debtors after bad debts. This gives good debtors.
5Apply the discount rate to good debtors to get the new provision for discount.
6Compare with the old provision for discount shown in the trial balance. Find the increase or decrease.
7Pass the entry for the difference and show it in Profit and Loss. Deduct the new provision from debtors in the balance sheet.

Quickest way: Three-line shortcut for MCQs

When to use it: Use it when the question asks only for the amount charged to Profit and Loss or the closing provision.

Write: Debtors − bad debts = A.
Write: A − (A × doubtful %) = B. Then provision for discount = B × discount %.
Subtract the old provision. Check the options for that difference and drop any option equal to the full new provision, unless there is no old provision.

Common mistakes in Provision for Discount on Debtors

Calculating the discount provision on total debtors.
Students skip the deductions and use the first debtors figure they see.
Fix: Always deduct bad debts and the doubtful debts provision first, in that order.
Charging the whole new provision to Profit and Loss when an old provision exists.
Students forget the opening balance is already in the books.
Fix: Charge only the difference between the new and the old provision.
Calculating the doubtful debts provision before deducting bad debts.
The adjustments are read in the order given, not in logical order.
Fix: Deduct bad debts first. Then apply the doubtful percentage to the reduced debtors.
Treating discount actually allowed during the year as the provision.
Both use the word discount.
Fix: Discount allowed is an actual expense in the year. The provision is an estimate for next year's discount.
Deducting only one provision from debtors in the balance sheet.
Students forget there are two separate provisions.
Fix: Show debtors, then deduct both the provision for doubtful debts and the provision for discount.

Worked examples

Example 1

On 31 March, Sundry Debtors were ₹1,20,000. Further bad debts of ₹5,000 are to be written off. Create a provision of 5% for doubtful debts and 2% for discount on debtors. There were no old provisions. Find the amount charged to Profit and Loss for the two provisions.

Show the solution

Debtors after bad debts = 1,20,000 − 5,000 = ₹1,15,000.
Provision for doubtful debts = 5% of 1,15,000 = ₹5,750.
Good debtors = 1,15,000 − 5,750 = ₹1,09,250.
Provision for discount = 2% of 1,09,250 = ₹2,185.
Entry: Profit and Loss A/c Dr. ₹2,185; To Provision for Discount on Debtors A/c ₹2,185.
Charge for the two provisions = 5,750 + 2,185 = ₹7,935.
The ₹5,000 of bad debts is a separate charge to Profit and Loss. It is not part of the charge for the two provisions. If the question asked for the total charge including bad debts, it would be 7,935 + 5,000 = ₹12,935.

Answer: The amount charged to Profit and Loss for the two provisions is ₹7,935 (doubtful debts ₹5,750 and discount ₹2,185). The ₹5,000 of bad debts is charged separately; the total with bad debts would be ₹12,935.

Example 2

Debtors on 31 March were ₹2,10,000 before adjustments. Bad debts of ₹10,000 are to be written off. Provision for doubtful debts is 5%. Provision for discount is 3%. The trial balance shows an old provision for discount on debtors of ₹4,000. Find the new provision and the amount charged to Profit and Loss for it.

Show the solution

Debtors after bad debts = 2,10,000 − 10,000 = ₹2,00,000.
Provision for doubtful debts = 5% of 2,00,000 = ₹10,000.
Good debtors = 2,00,000 − 10,000 = ₹1,90,000.
New provision for discount = 3% of 1,90,000 = ₹5,700.
Old provision = ₹4,000, so increase = 5,700 − 4,000 = ₹1,700.
Entry: Profit and Loss A/c Dr. ₹1,700; To Provision for Discount on Debtors A/c ₹1,700.
Balance sheet: Debtors ₹2,00,000 less provision for doubtful debts ₹10,000 and less provision for discount ₹5,700 = ₹1,84,300.

Answer: New provision is ₹5,700. ₹1,700 is charged to Profit and Loss. Debtors are shown net at ₹1,84,300.

Exam tips

Read whether the provision rate applies to debtors before or after bad debts. The default is after bad debts and after the doubtful debts provision.
Check the trial balance for an old provision. If one exists, only the difference goes to Profit and Loss.
Questions often ask for several outputs: the new provision, the amount charged, or net debtors. Reread the last line before choosing an option.
Use simple multiplication and check that the answer is smaller than the good debtors figure. A larger answer signals a slip.
Remember that bills receivable are generally not included in debtors for these provisions unless the question says so.

Practice questions from Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Provision for Discount on Debtors: frequently asked questions

Why is the provision for discount on debtors calculated after the provision for doubtful debts?

Doubtful debtors may never pay, so they will not claim discount. Only the debtors expected to pay are likely to take it. Hence the base is debtors less bad debts less the doubtful debts provision.

What is the journal entry for provision for discount on debtors?

Debit Profit and Loss Account and credit Provision for Discount on Debtors Account for the amount of the provision or its increase. If the provision falls, reverse it: debit the provision account and credit Profit and Loss Account.

Is the provision for discount on debtors an expense or a liability?

The charge to Profit and Loss is an expense. In the balance sheet, the provision is deducted from sundry debtors, so it is not shown as a separate liability in this treatment.

Is discount allowed to debtors the same as provision for discount on debtors?

No. Discount allowed is the actual discount given when a debtor pays during the year. The provision is an estimate of discount to be allowed in the next period on the closing debtors.