An extract of Trial balance from the books of Tahiliani and Sons Enterprises on March 31, 2017 is given below: Sundry debtors: 50,000 (Debit) Bad debts: 6,000 (Debit) Provision for doubtful debts: 4,000 (Credit)
Additional Information:
- Bad Debts proved bad but not recorded amounted to ₹ 2,000.
- Provision is to be maintained at 8% of Debtors.
Give necessary accounting entries for writing off the bad debts and creating the provision for doubtful debts account. Also show the necessary accounts.
Books of Tahiliani and Sons Enterprises Journal Entries
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 2017 | ||||
| Mar. 31 | Bad Debts A/c Dr. | 2,000 | ||
| To Sundry Debtors A/c | 2,000 | |||
| (Being bad debts written off) | ||||
| Mar. 31 | Profit & Loss A/c Dr. | 8,000 | ||
| To Bad Debts A/c | 8,000 | |||
| (Being bad debts transferred to Profit & Loss A/c) | ||||
| Mar. 31 | Provision for Doubtful Debts A/c Dr. | 160 | ||
| To Profit & Loss A/c | 160 | |||
| (Being excess provision written back) |
Ledger Accounts
Bad Debts Account
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| 2017 | 2017 | ||||
| Mar. 31 | Balance b/d | 6,000 | Mar. 31 | Profit & Loss A/c | 8,000 |
| Mar. 31 | Sundry Debtors | 2,000 | |||
| Total | 8,000 | Total | 8,000 |
Provision for Doubtful Debts Account
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| 2017 | 2017 | ||||
| Mar. 31 | Profit & Loss A/c | 160 | Apr. 01 | Balance b/d | 4,000 |
| Mar. 31 | Balance c/d | 3,840 | |||
| Total | 4,000 | Total | 4,000 |
Profit and Loss Account (Extract)
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Bad Debts | 8,000 | By Provision for DD | 160 |
Working Notes:
- Bad Debts: Old (₹6,000) + New (₹2,000) = ₹8,000.
- New Provision: 8% of (₹50,000 - ₹2,000) = 8% of ₹48,000 = ₹3,840.
- Adjustment: Old Provision (₹4,000) - New Provision (₹3,840) = ₹160 (Excess).
Explanation
This solution applies the rules for adjusting bad debts and provisions found in the textbook context. First, additional bad debts (₹2,000) are written off against Sundry Debtors. The total bad debts (₹8,000) are then debited to the Profit & Loss Account. Next, the new provision is calculated at 8% on the adjusted debtors balance (₹48,000), resulting in ₹3,840. Finally, the old provision balance (₹4,000) is compared with the new requirement; the excess (₹160) is written back to the Profit & Loss Account. This matches the textbook answer key: New provision ₹3,840 and net P&L debit of ₹7,840.
Solution Steps
Step 1: Write off additional bad debts of ₹2,000 from Sundry Debtors.
Step 2: Calculate total Bad Debts charge for P&L: ₹6,000 (Trial Balance) + ₹2,000 (Additional) = ₹8,000.
Step 3: Determine balance of Sundry Debtors for provision: ₹50,000 - ₹2,000 = ₹48,000.
Step 4: Calculate New Provision: 8% of ₹48,000 = ₹3,840.
Step 5: Calculate adjustment for Provision: Old Provision (₹4,000) - New Provision (₹3,840) = ₹160 (Credit to P&L).
Step 6: Determine net impact on P&L: ₹8,000 (Debit) - ₹160 (Credit) = ₹7,840 (Net Debit).