It is quite a common practice to allow debtors in a business venture, a certain amount of cash discount that would enable them to pay the monetary amount that is due at an earlier date. However, it is also taken that the amount that is received from them would be less in monetary value that would make it a loss in the debit position of profit and loss account. Similarly, if the discount that is allowed appears within the Trial Balance, and is categorically shown on debit side of Profit and Loss account. However, this prospect of discount on debtors is applicable only to good debtors, whose credibility has been proved.
A provision for discount on debtors can be taken in the adjustment scenario, and this discount on debtors would be calculated on given rate for debtors. Placed on debit side of the profit and loss account, this is also deducted from debtors on assert side of the Balance Sheet.
How to calculate discount on debtors?
This is a special facility that is available only to those debtors who have proven to be good over a certain period of time. Negating the others as bad debtors, this discount on debt facility is only for a chosen few.
Say a bad debt has been given and you have been asked to create a provision specifically for bad and doubtful debts along with discount on debtors.
In such a scenario: Provision for doubtful debts – Provision for bad debts.
Provision for doubtful debts is to be created and amount from debtors is deducted and discount on debtors is counted on deducted amount of debtors.
What is the relation between Bad debts and provision for Bad debts?
The whole concept of bad debts provision is present to ensure that there is a balance in regards to debts if a particular business ever had to face one. It is primarily due to this reason that this account is closed with final transfer to profit and loss account.
It is the balancing figure that is present that is transferred to the profit and loss account.
A detailed maintenance of this account is stated.
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