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

Which statement correctly describes a provision for doubtful debts created at the end of the year?

A provision for doubtful debts is a charge against the year's profit, made on grounds of prudence, and is deducted from sundry debtors in the balance sheet. It is neither an appropriation of profit nor a cash transfer, and it is not a gain.

  1. AIt is a charge against profit for the year and is deducted from sundry debtors in the balance sheetCorrect
  2. BIt is an appropriation of profit made only after the net profit has been determined
  3. CIt is a reduction of cash because the amount is set aside in a separate bank account
  4. DIt is a gain credited to the profit and loss account of the year

Explanation

A provision for doubtful debts is an expense debited to the profit and loss account, based on prudence. The credit goes to the Provision account, which is shown as a deduction from debtors. It is not an appropriation of profit and does not involve moving any cash, so the appropriation and cash options are wrong.

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