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Provision for Doubtful Debts
Provision for doubtful debts involves estimation of values. Estimates are made in respect to the company’s receivables. The accountant allows for potential loss of failure to recover the receivables. Primarily, experience shapes the amounts provided for the doubtful debts. For instance, the company agrees to the allowance amount by applying a certain percentage of all the receivables. To record the allowance in the books of accounts, the accountant creates a provision for doubtful debts credit account. The amount is netted off against the total receivables. Indeed, it acts as a contra account to the company’s receivables. To complete the double entry, a corresponding debit entry to record an expense in the income statement is made (Jackson & Liu, 2010).
Below is a journal entry to record an allowance for the doubtful debts;
Debit: Provision for doubtful debts (Income Statement)/ Profit and loss a/c
Credit: Provisions for doubtful debts (Balance sheet)
The provision meets accrual accounting principle since the allowance provides for the receivables recognized in the current accounting period. Subsequent entries only recognize the movements in the account (Ding & Su, 2008). Principally, only increases and decreases in the provision amount affect the financial statements. For instance, an increase in the account is recognized in the income statement as an expense. As a result, the accountant should debit the profit and loss account and credit the provision for doubtful debts account. In a case of a reduction in the allowance for the doubtful debts, the accountant credits the profit and loss account and debits the provision for doubtful debts account. The International Accounting Standards Board has issued International Financial Reporting Standards (IFRS 9) to provide guidance on accounting for and adjusting the provisions for doubtful debts (Ding & Su, 2008).