Provisions:
Provisions mean providing for possible losses or liabilities. The amount of which cannot be determined exactly. It is create to meet specific losses or liabilities which may be expected but not yet incurred. Provisions are usually created by debiting the profit and loss account. They are either deducted on assets side of balance sheet or shown on the liabilities under appropriate heading. The examples of some provision are:
a. Provision for doubtful on debtors.
b. Provision for discount on debtors.
c. Provision for taxation
d. Provision for repairs and renewals
e. Provision for depreciation
f. Provision for fluctuation in investments
Objectives of Provisions
The following objectives of provisions are:
a. Provision is created to cover loss in the value of assets.
b. Provision is created to meet anticipated losses and liabilities such as provision for doubtful debts, provision for taxation etc.
c. Provision is created to show correct financial statement and to report true profit and position of business.
Preparation of Provision for Doubtful Debts Account
While preparing provision for doubtful debts account, the following procedures should be following:
Step 1 any provision for bad depts. Papering in credit column of trial balance should be treated as opening balance and should be brought forward on the credit side of provision for doubtful debt amount.
Step 2 bad debts to be written off (outside trial balance) should be written off with the help of the following entries.
Step 3 now total debit balance of bad debts account (which includes bad debts written off during the year as well as written off now) is transferred to provision for doubtful debts account by recording the following entries:
Step 4 the new provision for doubtful debts required for next year’s (as per adjustment) in put out on the debt side of the provision for doubtful debts accounts as ‘To balance c/d’.
Step 5 the balance figure of provision for doubtful debts account is teetered to profit and loss account.
Effect in final accounts
1. In profit and loss account
When amount of bad debts written off its more than amount of provision for doubtful debts
2. When amount of bad debts written off is less than amount of provision for doubtful debts
Provision for Discount on Debtors
Discount is allowed to debtors if they make quick and prompt payment. At the end of the accounting year, there may be certain debtors to be allowed discount which is an expected loss. to meet such discount, a provision is created form the profit of current year which is called provision for discount on debtors.
Note: New provisions for discount on debtor is to be calculated on the good debtors because discount is allowed to good debtor but not to bad and doubtful debts.