Question
Why is Provision for Doubtful Debts created? How is it shown in the Balance Sheet?
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Answer
A provision is created to cover any possible loss on account of bad-debts likely to occur in future. Such a provision is created at a fixed percentage on debtors every year and is called “Provision for Bad and Doubtful Debts'. The term “Provision should be used instead of “Reserve' because the aim is not to strengthen the financial position of the business but to cover an expected future loss. The amount of Provision for Doubtful Debts on the one hand, is shown on the debit side of the Profit and Loss Account and on the other hand, is deducted from Sundry Debtors on the assets side of the Balance Sheet, so that the debtors may appear at their realisable value in the Balance Sheet.
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