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

Which entry correctly creates a provision for discount on debtors at the year end?

The provision is created by debiting Profit and Loss Account and crediting Provision for Discount on Debtors Account, because the expected discount is an anticipated expense and the provision is a credit balance shown against debtors.

  1. AProvision for Discount on Debtors A/c Dr to Profit and Loss A/c
  2. BDiscount Allowed A/c Dr to Debtors A/c
  3. CProfit and Loss A/c Dr to Provision for Discount on Debtors A/cCorrect
  4. DProfit and Loss A/c Dr to Discount Received A/c

Explanation

Creating the provision is an expected expense, so Profit and Loss Account is debited and Provision for Discount on Debtors Account is credited. Option one reverses the entry and would be used for a write back.

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