Skip to content

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

A trader creates a provision for doubtful debts at the end of the year. Where does the amount of the provision charged for the year appear in the final accounts of a sole proprietor?

The provision for doubtful debts charged for the year is debited to the Profit and Loss Account as an expense. This follows prudence, since likely losses must be anticipated. The balance of the provision is then shown as a deduction from sundry debtors in the Balance Sheet.

  1. ACredited to the Profit and Loss Account as income
  2. BDebited to the Profit and Loss Account as an expenseCorrect
  3. CDebited to the Trading Account as part of cost of goods sold
  4. DAdded to the proprietor's capital in the Balance Sheet

Explanation

Creating or increasing a provision is a charge based on prudence, so it is debited to the Profit and Loss Account. The provision itself is then deducted from sundry debtors on the asset side. Crediting it as income would apply only to a reduction in the provision.

Did you get it right without looking?

One question tells you little. A timed set on Accounting Treatment of Bad Debts and Provision for Doubtful Debts shows your real accuracy, how long you take and where you lose marks.

Practise Accounting Treatment of Bad Debts and Provision for Doubtful DebtsFree diagnostic mock

More Accounting Treatment of Bad Debts and Provision for Doubtful Debts questions