Q.A Trial Balance shows Sundry Debtors ₹1,00,000 and an existing Provision for Doubtful Debts (Cr.) of ₹4,000. Adjustments require writing off further bad debts of ₹2,000 and maintaining a provision of 5% on the remaining debtors. The amount debited to the Profit and Loss Account for this adjustment is:
(A) ₹2,000
(B) ₹4,900
(C) ₹2,900
(D) ₹6,900

With no existing provision, the full amount of a newly created provision for doubtful debts is debited to the Profit and Loss account, so the correct answer is option (c).

A provision for doubtful debts is an estimated loss on debtors. Creating it involves two effects:

• The amount is debited to the Profit and Loss account (charged against profit as an anticipated loss), and
• The Provision for Doubtful Debts account is credited (shown as a deduction from Sundry Debtors in the Balance Sheet). …

With no old provision, the whole provision for doubtful debts is debited to the Profit and Loss account.

A provision for doubtful debts is an estimated amount set aside for debtors who may fail to pay. Following the prudence (conservatism) concept, anticipated losses are provided for in advance.

When there is no existing (opening) provision, the entire provision created is treated as a fresh charge against the year's profit: