Doubts relating to Provision for Bad Debts

Others 1472 views 3 replies

 

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. If this procedure is not followed, conceptually it will mean that the provision was created for not only the current year’s account receivable, but also the accounts receivable of the subsequent year! Do we really mean to create the provision in this way?

 

 Please excuse me if I am wrong fundamentally as I am not an accounting student or pursuing any accounting course.

 

Nirvan.

Replies (3)

 Please see the attached file.

Hi Nirvan,

Your query is quite interesting. Your point is that if the provision has been created in the year 2009 then it should be utilised for the bad debts related to the receivables of the year 2009 and not subsequent years. I will try to clarify...

As the name suggests it is only a provision for the probable loss, so it can not be estimated exactly. And consequently access or shortage of provision against the actual bad debt is very likely.

Lets think this way, you estimated a loss of Rs.10000 as bad debt in the year 2009 and provided for the same as provision. But the real loss was say Rs.8500. Now what should we do with the rest Rs.1500 if we do not use it for subsequent year's bad debt loss.

Moreover the access of Rs.1500 provision is taken into consideration while making fresh provision in the subsequent year i.e., the new provision should be less by Rs.1500.

Please write any further doubt on this.

Can any provision be made if the year is under loss


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