Accounting Entries for Provision for Doubtful Debts
For this provision a business might know from past experience that say 5% of debtors balances are unlikely to be collected. It would then be considered prudent to make a general provision of 5%.
It may be that no particular customers are regarded as suspect and so it is not possible to write off any individual customer balances as bad debts. The procedure is then to leave the total debtors balances completely untouched, but to open up a provision account by the following entries,
Doubtful debts account - Debit
Provisions for doubtful debts - Credit
When preparing a balance sheet the credit balance on the provision account is deducted from the total debts balances in the debtors’ ledger.
In subsequent years adjustments may be needed to the amount of the provision. The procedure to be followed then is as follows.
- Calculate the new provisions required.
- Compare it with existing balance on the provision account.
- Calculate increase or decrease required.
- If a higher provision is required
Provision of doubtful debts - Credit
Profit and loss account - Debit
- If a lower provision is needed now than before
Profit and loss account - Credit
Provision for doubtful debts - Debit