Provision for Doubtful Debts
Even after deducting the amount of actual bad-debts from the Debtors, there may still be some debts which may be regarded as bad or doubtful. Thus a business might make an estimate of the amount of such doubtful debts, that is, debts that are likely to become bad, and charge them as an expense against the current period’s revenue.
When Provision for Doubtful Debts is set up for the first time
Accounting Entries
| Doubtful Debts Account | Dr. | |
| Provision for doubtful debts | ||
| (Being creation of provision for doubtful debts) | ||
Closing Entries
Doubtful Debts Account is an expense for the business and thus it will be debited to the Profit and Loss account
| Profit and Loss Account | Dr. | |
| Doubtful debts Account | ||
| (Being transfer of doubtful debts expense to the Profit and Loss Account) | ||
It will be deducted from the Sundry Debtors in the Balance Sheet.
Increasing the Existing Provision for Doubtful Debts
Adjusting Entry
| Doubtful debts Account | Dr. | |
| Provision for doubtful debts Account | ||
| (Being increase of provision for doubtful debts) | ||
Closing Entry
Being a loss for the business the Doubtful Debts Account is transferred to the debit side of Profit and Loss Account.
| Profit and Loss Account | Dr. | |
| Doubtful Debts | ||
| (Being transfer of doubtful debts expense to the Profit and Loss Account) | ||
Decreasing the Existing Provision for Doubtful Debts
Adjusting Entry
| Provision for doubtful debts Account | Dr. | |
| Doubtful debts Account | ||
| (Being decrease of provisions for doubtful debts) | ||
Closing Entry
Being a gain for the business the Doubtful Debts Account is transferred to the Credit side of Profit and Loss Account.
| Doubtful Debts Account | Dr. | |
| Profit and Loss Account | ||
| (Being transfer of doubtful debts expense to the Profit and Loss Account) | ||
In the Balance Sheet the debtors will appear net of the Provision for Doubtful debts.