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

On 1 April, the provision for doubtful debts of Mehta & Co. stood at Rs 18,000. At 31 March, debtors were Rs 1,60,000 after writing off bad debts, and the provision is to be 8% of debtors. What is the effect on the Profit and Loss Account for the year because of the provision alone?

The Profit and Loss Account is credited with Rs 5,200. The required provision is 8% of Rs 1,60,000, which is Rs 12,800, while the opening provision is Rs 18,000. The excess of Rs 5,200 is no longer needed and is written back as a gain.

  1. ADebit of Rs 12,800
  2. BCredit of Rs 5,200Correct
  3. CDebit of Rs 5,200
  4. DCredit of Rs 12,800

Explanation

Required provision = 8% of 1,60,000 = 12,800. The existing provision is 18,000, so it is excessive by 5,200. The excess is written back and credited to Profit and Loss Account. Debiting 12,800 would ignore the opening balance.

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