PROVISION FOR DOUBTFUL DEBTS

Convention of Conservatism or Prudence is followed for recording transactions . The convention requires that provision for expected losses should be made while expected profits and gains should not be accounted . A firm , therefore , makes provision at the end of the accounting year for Bad Debts that may occur in the next year . This is for the reason that a part of debts may become irrecoverable from debtors in the next year , i,e., they become doubtful of recovery . It is proper to provide for such possible Bad Debts every year . The entry for providing for doubtful debts is :

Profit and loss A/c        ...Dr .

   To provision for Doubtful Debts A/c 

( Being the provision made for Doubtful Debts ) 

Debit to the profit and loss Account will reduce profit for the current year by the amount of provision . The amount of provision is carried forward to the next year. Next year , when Bad Debts actually occur and are written off , Bad Debts Account is debited to provision for Doubtful Debts Account. The amount of the Bad Debts is not debited to profit and losss Account since it is already debited in the earlier years .It should be noted that the Customers Account or Sundry Debtors Account is not affected by creating Provision for Doubtful Debts . Provision for Doubtful Debts Account is shown in the Balance Sheet by way of deduction from the amount of debtors . But , it should be kept in mind that the two accounts are separate . The Provision for Doubtful Debts Account may appear as follows ( imaginary amounts ) :