Account 4 Marks Question

The provision for doubtful-debts is provided after deducting the amount of bad-debts from the debtors. The provision for doubtful-debts is provided because of the rationale that the actual amount of bad-debts will only be known in the next year, when the amount of debtors will get realised. Thus, it will only then be known as to how many of the debtors have become bad. Thus, in order to bridge-up the expected future loss, we create a provision for doubtful-debts. For the provision for doubtful-debts, we prepare debtors account and provision for doubtful-debts account. For recording bad-debts, the following journal entry is passed.
Example: An extract from a Trial Balance as on December 31, 2010.

Debtors Provision for Doubtful Debts as on January 01, 2010 Bad Debts Account

10,500 1,000 1,500

Adjustment:

1. Further bad-debts amount to Rs 500.
2. Create a provision for doubtful-debts at 5% on debtors.

Explanation The provision for Doubtful Debt as on January 01, 2010 was ₹ 1,000 and the Bad Debts during the year were ₹ 1,500. In addition to this, there was a further Bad Debt of ₹ 500 which was known at the end of the year i.e., December 31, 2010. Now we need to create a provision for Doubtful Debts at 5% on debtors.

1. Just like a journal, transactions in the Cash book are recorded for the first time from source documents.
2. Just like a journal, transactions in the Cash book are recorded datewise, i.e., in a chronological order, as and when they take place.
3. Just like a journal, transactions from Cash book are also posted to the relevant accounts (except Cash account) in the ledger.
4. Just like a journal, a Cash book also contains a Ledger Folio Column.

It is extremely important to record the adjusting entries in the preparation of final accounts.

1. This is done in order to assess the true net profit or net loss of the business organisation.
2. It helps us record those adjustments which were left or omitted and were not recorded in the accounts.
3. It assists us to separate all the financial transactions into a year-wise category. The financial statements include only those entries which belong to the current year. It rules out the previous and forthcoming years’ entries which are the basis for accrual basis of accounting.
4. Further, it provides us the room for making various provisions which are made at the end of the year, after assessing the entire year’s performance.

Adjusting entries are the entries of those adjustments which are given outside the trial balance and which help us reflect the true financial position i.e., profit or loss of an organisation. According to the double-entry system, all the adjustments given outside the Trial Balance are posted at two places. The adjusting entries are necessary they enable us to post and take into account those items which are omitted or entered with the wrong amount and/or recorded under wrong heads.
The treatment of adjusting entries is necessary.

1. It helps us assess the true financial position of an organisation based on accrual basis of accounting.
2. It helps us know the actual figure of profit or loss.
3. It records the omitted entries and rectifies the errors made.
4. It helps in providing depreciation and making different provisions, such as Bad Debts and depreciation.