Bad Debts, Provision for Doubtful Debts and Provision for Discount on Debtors

Further Bad Debts (as an adjustment)

Sometimes, AFTER the Trial Balance has already been drawn up, the business discovers that a further amount owed by a debtor has become irrecoverable. This further bad debts figure is given as an adjustment.

Double effect:

1. Debited to the Profit and Loss Account as an expense (Bad Debts).
2. Deducted from Sundry Debtors on the assets side of the Balance Sheet.

Provision for Doubtful Debts

Meaning: since some of the REMAINING debtors (after further bad debts are written off) may also eventually turn bad, prudent accounting sets aside a Provision for Doubtful Debts — usually a given percentage of the remaining debtors — as a precaution, WITHOUT waiting for an actual default to be confirmed.

Double effect (only the CHANGE in provision affects the current year's P&L):

1. If a Trial Balance already carries an OLD provision (from the previous year), the amount actually debited to THIS year's Profit and Loss Account is: Further Bad Debts + New Provision required − Old Provision (this nets out to just the year's genuine additional charge).
2. The New Provision is deducted from Sundry Debtors (after further bad debts) on the Balance Sheet's assets side.

Provision for Discount on Debtors (brief)

Meaning: a further, smaller provision, calculated on the debtors figure AFTER deducting the Provision for Doubtful Debts, to allow for the CASH DISCOUNT the business expects to give to prompt-paying debtors. It follows the identical double-effect logic — debited to P&L, deducted from Debtors on the Balance Sheet (after the doubtful-debts provision has already been deducted).