I am a little confused regarding accounting for bad debts using the provision method. To my understanding a provision for bad debts is created for Accounts Receivable which represents the estimate of Accounts Receivable for current year that are not expected to be collected in the subsequent period. Accordingly an expense is shown in the current period.
In the subsequent periods all the write-offs are closed to this provision either directly or indirectly (through a bad debts expense account). My confusion relates to the fact that not all the write-offs in the subsequent period are for accounts for which the provision had been created. Some of the bad debts might relate to Accounts Receivable that originated in the same period and thus should not be closed to the Provision for bad debts account.
Thus my point is that when a particular account is considered bad and has to be written off, the account should be examined so as to figure out whether it represents the Accounts Receivable of the current period or the previous period. It should be closed to the provision for bad debts only if it originated in the previous period. The net effect on the P&L account may be same but this procedure follows the concept for which the Provision is created.
Nirvan.
CAclubindia
