Accounting Treatment of Provisions for Doubtful Debts and Discounts Allowed

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There are following important points related to accounting treatment of provisions for doubtful debts and discounts allowed:

(1) Both provisions for doubtful debts and provision for discounts allowed are contra assets and are shown in the balance sheet and deducted from trade receivables.

(2) The amounts with which provisions for doubtful debts and discounts allowed increase are deducted from gross profit in the income statement as expenses.

(3) The amounts with which provisions for doubtful debts and discounts allowed decrease are added in gross profit in the income statement as incomes.

(4) Bad debts and provision for doubtful debts are treated as completely separate items.

(5) Unlike other expenses, discounts allowed, bad and doubtful debts are “non-cash” expenses. This means that cash is not paid on occurrence of expenses.

(6) Provision for doubtful debts is calculated as a percentage of trade receivables after deducting all bad and doubtful debts.

(7) Calculation of provision for discounts allowed is based on net trade receivables after deducting all bad debts and doubtful debts.

(8) At any point of time the total amount of provision for doubtful debts is equal to the total net amount charged to the income statement right from the first year on account of change in provision for doubtful debts.

(9) Provisions for doubtful debts and discounts allowed of last year are not considered while calculating provisions of current year. However, last year provisions are used to calculate increase or decrease in provisions for inclusion in the income statement.