Explain the following items and outline how they are treated in the final accounts: (a) increase in provision for doubtful debts (b) decrease in provision f...

Answer Details

(a) Increase in provision for doubtful debts

This arises when the new required provision is greater than the existing one. Only the increase is charged as an expense. It is debited to the Profit and Loss Account and added to the provision so that, in the Balance Sheet, the full new provision is deducted from debtors to show net debtors.

(b) Decrease in provision for doubtful debts

This arises when the new required provision is smaller than the existing one. The fall in the provision is treated as a gain. It is credited to the Profit and Loss Account (added to gross profit), and in the Balance Sheet the reduced (new) provision is deducted from debtors.

(c) Provision for discount on debtors

This is an estimate of the cash discount the business expects to allow debtors who pay promptly. The new provision (or the increase) is debited to the Profit and Loss Account. In the Balance Sheet it is deducted from debtors, after first deducting the provision for doubtful debts (so it is calculated on good debtors only).

(d) Provision for discount on creditors

This is an estimate of the cash discount the business expects to receive from creditors for prompt payment. It is treated as an anticipated income: the provision (or increase) is credited to the Profit and Loss Account, and in the Balance Sheet it is deducted from creditors under current liabilities.

(e) Provision for depreciation

This is the accumulated amount set aside to spread the cost of a fixed asset over its useful life. Each year's depreciation charge is debited to the Profit and Loss Account. The accumulated provision for depreciation is deducted from the cost of the fixed asset in the Balance Sheet to show the net book value.