In preparing a profit and loss account, a decrease in provision for doubtful debts accounts is treated as

A provision for doubtful debts is an estimate, deducted from total debtors, of the amount of debt that the business expects it will not be able to collect. Because it is only an estimate, the provision is reviewed and adjusted at the end of each accounting period to match current expectations about which debts might go bad.

When the provision needed at the end of a period is smaller than the provision already carried forward from the previous period, the excess is no longer required. This excess is written back, and because it reverses an expense that had previously reduced profit, it increases the profit of the current period. In the profit and loss account, this decrease in the provision is therefore added to gross profit, in the same way as any other item of income, rather than being deducted as an expense.

An increase in the provision for doubtful debts, by comparison, would be treated as an expense and deducted from profit, since it represents a fresh charge against expected bad debts for the period.

Examination tip: treat a rising provision as an expense and a falling provision as income; only the change in the provision, not its full balance, passes through the profit and loss account each period.