CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Treatment of Bad Debts and Provision for Doubtful Debts
Sharma Traders has debtors of Rs 2,00,000 on 31 March. It wants a provision for doubtful debts at 5% on debtors. The provision account has an opening credit balance of Rs 6,000 and no bad debts are to be written off. What amount will be debited to the Profit and Loss Account for the year?
The charge to Profit and Loss is Rs 4,000. The required closing provision is 5% of Rs 2,00,000, which is Rs 10,000, and since Rs 6,000 already exists, only the shortfall of Rs 4,000 is added as an expense for the year.
- ARs 4,000Correct
- BRs 10,000
- CRs 16,000
- DRs 6,000
Explanation
Required provision = 5% of 2,00,000 = Rs 10,000. Existing provision is Rs 6,000, so the additional charge is 10,000 - 6,000 = Rs 4,000. Charging the full Rs 10,000 ignores the opening provision.
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