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

Sharma Traders had sundry debtors of Rs 2,40,000 on 31 March before any adjustment. Bad debts of Rs 15,000 are still to be written off. Provision for doubtful debts is to be kept at 5% of the remaining debtors. The old provision balance was Rs 6,000. What is the amount charged to the Profit and Loss Account for the provision for the year (excluding bad debts)?

The additional provision charged is Rs 5,250. Debtors after writing off bad debts are Rs 2,25,000, and 5% of that gives a required provision of Rs 11,250. Deducting the existing provision of Rs 6,000 leaves Rs 5,250 to be debited to Profit and Loss Account.

  1. ARs 5,250Correct
  2. BRs 11,250
  3. CRs 12,000
  4. DRs 6,000

Explanation

Debtors after bad debts = 2,40,000 - 15,000 = 2,25,000. Required provision = 5% of 2,25,000 = 11,250. Less old provision 6,000 gives an additional charge of 5,250. Using 5% on 2,40,000 gives 12,000, and charging 6,000 would be a different mistake, so the stated option is correct.

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