7. BAD DEBTS
Meaning: Out of total debts, Debts which are definitely irrecoverable are called Bad Debts.
Treatment:
Bad Debts A/c Dr.
To Sundry Debtors a/c
Two fold effect:
1. Shown on debit side of P & L a/c.
2. Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors.
8. PROVISION FOR DOUBTFUL DEBTS
Meaning: It is a provision created to cover any possible loss on account of bad-debts likely to occur in future.
Treatment:
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c
Two fold effect:
1. On debit side of Profit and Loss A/c or by way of addition to Bad Debts. (Old provision for doubtful debts at the beginning of the year will be deducted).
2. Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors (deducting further bad debts if any).
9. PROVISION FOR DISCOUNT ON DEBTORS
Meaning: If sales are made by the merchant on condition that if the amount of sales is paid within a certain period, he will allow a certain percentage of discount.
Treatment:
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c
Two-fold effect:
1. Shown on debit side of Profit and Loss A/c
2. Shown by way of deduction from Sundry Debtors (after deduction of further bad debts and provision for doubtful debts) on assets side of Balance Sheet.
10. RESERVE FOR DISCOUNT ON CREDITORS
Meaning: Firm may have chance to receive discount on last date of accounting year, if the payment is made within the scheduled period .These are anticipated profit and therefore this account is made.
Treatment:
Reserve for Discount on Creditors A/c Dr.
To Profit & Loss A/c
Two fold effect:
1. Shown on the credit side of Profit &Loss A/c.
2. Shown on liabilities side of Balance Sheet by way of deduction from sundry creditors.
All the above cases can be easily understood from the following:
