Skip to content

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

Which statement about a provision for doubtful debts, as distinct from bad debts, is correct?

A provision for doubtful debts is an estimate of probable loss on debtors still outstanding, created by debiting Profit and Loss Account. Individual debtors' accounts remain unchanged because no particular debt has been written off. It is normally deducted from sundry debtors in the Balance Sheet.

  1. AIt is created only after a particular debtor is declared insolvent
  2. BIt is an estimate of probable loss on debtors still outstanding, and the debtors' ledger accounts remain unchangedCorrect
  3. CIt is credited to the individual debtor's account
  4. DIt is shown on the liabilities side as a separate item at the full amount of debtors

Explanation

A provision is an estimate of likely future loss on existing debtors, so individual debtor accounts are not credited. Bad debts, by contrast, are actual losses that remove the debtor balance. The provision is normally deducted from debtors in the Balance Sheet.

Did you get it right without looking?

One question tells you little. A timed set on Accounting Treatment of Bad Debts and Provision for Doubtful Debts shows your real accuracy, how long you take and where you lose marks.

Practise Accounting Treatment of Bad Debts and Provision for Doubtful DebtsFree diagnostic mock

More Accounting Treatment of Bad Debts and Provision for Doubtful Debts questions