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

A firm's trial balance shows Bad Debts Rs 4,000 and Provision for Doubtful Debts (opening) Rs 6,000. The closing provision required is Rs 5,000. How is this shown in the Profit and Loss Account?

Bad debts of Rs 4,000 are debited, and because the closing provision of Rs 5,000 is Rs 1,000 lower than the opening Rs 6,000, the Rs 1,000 excess is credited to Profit and Loss, giving a net charge of Rs 3,000.

  1. ABad debts Rs 4,000 debited and Rs 1,000 reduction in provision credited, net charge Rs 3,000Correct
  2. BBad debts Rs 4,000 debited and Rs 5,000 provision debited, total Rs 9,000
  3. CBad debts Rs 4,000 debited and Rs 1,000 added as extra provision, total Rs 5,000
  4. DOnly Rs 5,000 provision debited

Explanation

Closing provision of 5,000 is less than the opening 6,000, so the excess of Rs 1,000 is written back as a credit to Profit and Loss. Net charge = 4,000 - 1,000 = 3,000. Debiting the full new provision ignores the opening balance.

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