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

Kaveri Stores had an opening provision for discount on debtors of Rs 1,800. At the year end, good debtors are Rs 70,000 and the provision required is 2%. What is charged to the Profit and Loss Account for this provision?

A Rs 400 credit is taken to Profit and Loss Account. The required provision is 2% of Rs 70,000, which is Rs 1,400, while the opening balance is Rs 1,800, so the excess Rs 400 is written back as a gain.

  1. ARs 1,400 credited as a gain
  2. BRs 1,800 debited
  3. CRs 400 credited as a gainCorrect
  4. DRs 1,400 debited as an expense

Explanation

Required provision = 2% of 70,000 = Rs 1,400. The existing provision is Rs 1,800, so it is reduced by Rs 400. The excess is written back and credited to Profit and Loss Account. Rs 1,400 is only the closing balance, not the change.

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