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

Provision for Doubtful Debts: Entries and Problems

Updated 10 October 2026 · Fact-checked

Provision for doubtful debts is an amount set aside from profit this year to cover expected future bad debts on debtors. You debit Profit and Loss Account and credit the provision account. Later, only the change in the required provision is charged: the increase is an expense, the decrease is a gain.

Understand Provision for Doubtful Debts

Some of your debtors may never pay. You do not know which ones yet, but you can estimate the loss. The accrual principle and prudence say you should show this likely loss in the year of the sale, not when the debt finally turns bad.

That is why we create a provision for doubtful debts (also called provision for bad debts). It is a charge against profit now, for a loss that is probable but not yet certain. It is different from a bad debt, which is a debt already confirmed as irrecoverable.

The provision is usually a percentage of debtors. Always calculate it on the good-looking debtors: debtors at the year end, after deducting any further bad debts written off in the adjustments. The provision account carries its balance forward from year to year. So each year you compare the new required provision with the old balance, and only the difference goes through Profit and Loss Account.

In the balance sheet, the provision is deducted from sundry debtors on the asset side. It is not shown as a separate liability.

Key formulas to remember

Required provision
New provision = Closing debtors (after further bad debts) × Rate of provision
If the rate is given on debtors, apply it to debtors only. Do not include bills receivable unless asked.
Creating the provision
Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c
Passed for the new provision in the first year.
Charge for the year
Charge to P&L = Bad debts + New provision − Old provision
Here, bad debts means the total bad debts charged to P&L, including further bad debts. The formula leaves out bad debts recovered, which is a gain and is deducted separately if given. Positive result is an expense. Negative result is a gain. Use this when old provision exists.
Increase in provision
Profit and Loss A/c Dr. To Provision for Doubtful Debts A/c (for the increase only)
Applies when new provision is greater than old provision.
Decrease in provision
Provision for Doubtful Debts A/c Dr. To Profit and Loss A/c (for the decrease only)
Applies when new provision is less than old provision. It is a gain.
Balance sheet presentation
Net debtors = Sundry debtors − Provision for doubtful debts
Show the provision as a deduction from debtors.

How to solve Provision for Doubtful Debts questions

Use this method for any question on creating, increasing or decreasing the provision.

  1. 1Note the closing debtors from the trial balance or the question.
  2. 2Deduct any further bad debts given in the adjustments. Write these off first.
  3. 3Multiply the remaining debtors by the given rate. This is the new provision.
  4. 4Find the old provision in the trial balance or the opening information. If none exists, it is zero.
  5. 5Compare. If new is more, the difference is an increase (debit P&L). If new is less, the difference is a decrease (credit P&L).
  6. 6Pass the journal entry for the difference only, and prepare the provision account if asked.
  7. 7In final accounts, put total bad debts and the increase in provision on the debit side of P&L. Show net debtors in the balance sheet.

Quickest way: One-line charge method for MCQs

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

  1. Compute the new provision: (closing debtors − further bad debts) × rate.
  2. Compute the P&L charge: total bad debts (including further bad debts) + new provision − old provision. If bad debts recovered are given, deduct them separately, as they are a gain.
  3. If the question asks only for the effect of the provision, use new − old. Positive means debit P&L, negative means credit P&L.
  4. Check each option for the wrong base. Options built on unadjusted debtors are usually traps.

Common mistakes in Provision for Doubtful Debts

  • Calculating the provision on debtors before deducting further bad debts.

    Students take the trial balance figure and forget the adjustment.

    Fix: Always reduce debtors by further bad debts first, then apply the rate.

  • Charging the whole new provision to P&L when an old provision exists.

    The previous year's balance is overlooked.

    Fix: Charge only new minus old. Look for the old provision in the trial balance.

  • Treating a decrease in provision as an expense.

    Students remember that provision means debit P&L and apply it blindly.

    Fix: A decrease is a gain. Debit the provision account and credit P&L.

  • Confusing bad debts with provision for doubtful debts.

    Both relate to debtors and both reduce profit.

    Fix: Bad debts are actual losses and credit the debtor. A provision is an estimate and credits the provision account, not any debtor.

  • Showing the full provision in the P&L and also deducting it in the balance sheet.

    Students think both statements must show the whole provision, so the same amount is counted twice.

    Fix: In the P&L, show only the net charge or credit for the year (new minus old). In the balance sheet, deduct the closing provision from debtors once.

  • Deducting bad debts from the old provision account.

    Students think the provision absorbs the bad debts directly.

    Fix: Unless the question says so, bad debts go to the Bad Debts Account and then to P&L. The provision account changes only when it is adjusted at year end.

Worked examples

Example 1

On 31 March 2027, Ramesh Traders has sundry debtors of ₹2,00,000. The provision for doubtful debts at the start of the year was ₹6,000. He wants a provision of 5% on debtors at year end. Find the amount charged to Profit and Loss Account and give the journal entry.

Show the solution
  1. New provision = 5% × ₹2,00,000 = ₹10,000.
  2. Old provision = ₹6,000.
  3. New provision is more, so there is an increase = ₹10,000 − ₹6,000 = ₹4,000.
  4. Journal: Profit and Loss A/c Dr. ₹4,000; To Provision for Doubtful Debts A/c ₹4,000.
  5. Provision account closing balance = ₹10,000, carried forward.

Answer: ₹4,000 is charged to Profit and Loss Account as an increase in provision. The closing provision is ₹10,000.

Example 2

Sundry debtors of Mehta & Sons on 31 March 2027 are ₹1,50,000. Further bad debts of ₹10,000 are to be written off. A provision of 5% is required on the remaining debtors. The opening provision is ₹9,000. Find the total effect on Profit and Loss Account and the debtors figure in the balance sheet.

Show the solution
  1. Debtors after further bad debts = ₹1,50,000 − ₹10,000 = ₹1,40,000.
  2. New provision = 5% × ₹1,40,000 = ₹7,000.
  3. Old provision = ₹9,000. New is less, so there is a decrease = ₹9,000 − ₹7,000 = ₹2,000.
  4. Journal for bad debts: Bad Debts A/c Dr. ₹10,000; To Sundry Debtors A/c ₹10,000.
  5. Journal for decrease: Provision for Doubtful Debts A/c Dr. ₹2,000; To Profit and Loss A/c ₹2,000.
  6. Net charge to P&L = ₹10,000 bad debts − ₹2,000 decrease = ₹8,000 debit. This matches the formula: ₹10,000 + ₹7,000 − ₹9,000 = ₹8,000.
  7. Balance sheet: Debtors ₹1,40,000 less provision ₹7,000 = ₹1,33,000.

Answer: The net charge to Profit and Loss Account is ₹8,000. Debtors are shown at ₹1,33,000 in the balance sheet after deducting the ₹7,000 provision.

Exam tips

  • Read the adjustments line by line. Look for further bad debts before you touch the rate.
  • Check the trial balance for an existing provision. Its presence changes the answer in many MCQs.
  • Note whether the question asks for the charge to P&L, the closing provision or net debtors. These are three different numbers.
  • Quickly eliminate options that equal the full new provision when an old provision exists.
  • Remember the sign: increase debits P&L, decrease credits P&L. There is no negative marking, so always attempt every question.

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

Provision for Doubtful Debts: frequently asked questions

What is the difference between bad debts and provision for doubtful debts?

Bad debts are debts already confirmed as irrecoverable and are written off from the debtor's account. Provision for doubtful debts is an estimate of future losses on debtors that remain. The provision is created from profit and does not touch any individual debtor.

What is the journal entry to create a provision for doubtful debts?

Debit Profit and Loss Account and credit Provision for Doubtful Debts Account with the amount of the provision. In later years, pass the entry only for the increase. For a decrease, reverse the direction.

Is provision for doubtful debts an expense or a liability?

The charge to Profit and Loss Account is an expense of the year. In the balance sheet, the provision is deducted from debtors, so it is not shown as a liability. Its purpose is to show debtors at the amount likely to be collected.

How do you treat a decrease in provision for doubtful debts?

If the new required provision is less than the old balance, the extra amount is no longer needed. Debit the Provision for Doubtful Debts Account and credit Profit and Loss Account with the difference. It increases profit.