Provisions For Doubtful Debts
When bad debts are written off, specific owed to the business are identified as unlikely ever to be collected, however because of the risks involved in selling goods on credit, it might be accepted that a certain percentage of outstanding debts at any time are unlikely to be collected.
But although it might be estimated that, say 10% debts will turn out bad the business will not know until later which specific debts are bad.
A general provision for doubtful debts is an estimate of the percentage of debt which are not expected to be paid.
- When a provision is first made the amount of this initial provision is charged as an expense in the profit and account of the business.
- When a provision already exists but subsequently increased in size, the amount of the increase in provision is charged as an expense in the profit and loss account for the period in which the increase provision is made.
- When a provision already exits but subsequently reduce in size, the amount of the decrease in provision is provision is recorded as an item of income in the profit and loss account.
The value of debtors in the balance sheet must be shown after deducting the provision for doubtful debts.