The following information are extract from the Trial Balance of M/s Nisha traders on 31 March 2017. Sundry Debtors: 80,500 Bad debts: 1,000 Provision for bad debts: 5,000 Additional Information Bad Debts: ₹ 500 Provision is to be maintained at 2% of Debtors.
Prepare bad debts account, Provision for bad debts account and profit and loss account.
Dr. Bad Debts Account Cr.
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2017 | 2017 | ||||
| Mar. 31 | To Balance b/d | 1,000 | Mar. 31 | By Profit & Loss A/c | 1,500 |
| Mar. 31 | To Sundry Debtors A/c | 500 | |||
| 1,500 | 1,500 |
Dr. Provision for Bad Debts Account Cr.
| Date | Particulars | Amount (₹) | Date | Particulars | Amount (₹) |
|---|---|---|---|---|---|
| 2017 | 2017 | ||||
| Mar. 31 | To Balance c/d | 1,600 | Mar. 31 | By Balance b/d | 5,000 |
| Mar. 31 | To Profit & Loss A/c | 3,400 | |||
| (Balancing figure) | |||||
| 5,000 | 5,000 |
Dr. Profit and Loss Account (Extract) Cr.
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Bad Debts | 1,500 | By Provision for Bad Debts | 3,400 |
| To New Provision for Bad Debts | 1,600 | ||
| 3,100 | 3,400 |
Working Notes:
- Calculation of New Provision: Sundry Debtors (Trial Balance) = ₹ 80,500 Less: Additional Bad Debts = ₹ 500 Debtors for Provision = ₹ 80,000 New Provision (2% of 80,000) = ₹ 1,600
Explanation
The solution follows the NCERT method for adjusting provisions. First, additional bad debts (₹ 500) are added to the existing bad debts (₹ 1,000) to find the total Bad Debts to be debited to the Profit & Loss Account (Total ₹ 1,500). Next, the New Provision is calculated at 2% on the adjusted debtors (₹ 80,500 - ₹ 500 = ₹ 80,000), resulting in ₹ 1,600. Finally, in the Provision for Bad Debts Account, the Old Provision (₹ 5,000 Credit) is compared with the New Provision (₹ 1,600). The surplus (₹ 3,400) is credited to the Profit & Loss Account. The Profit & Loss Account shows a net credit balance of ₹ 1,900 regarding these items (Cr ₹ 3,400 - Dr ₹ 3,100).
Solution Steps
Step 1: Calculate Total Bad Debts. Add Bad Debts from Trial Balance (₹ 1,000) and Additional Bad Debts (₹ 500). Total = ₹ 1,500.
Step 2: Calculate Debtors for Provision. Subtract Additional Bad Debts from Sundry Debtors (₹ 80,500 - ₹ 500) = ₹ 80,000.
Step 3: Calculate New Provision. 2% of ₹ 80,000 = ₹ 1,600.
Step 4: Prepare Bad Debts Account. Debit side shows total bad debts (₹ 1,500); Credit side transfers this amount to Profit & Loss Account.
Step 5: Prepare Provision for Bad Debts Account. Credit side shows Old Provision (₹ 5,000). Debit side shows New Provision (₹ 1,600) and the balancing figure credited to Profit & Loss (₹ 3,400).
Step 6: Prepare Profit & Loss Account extract. Debit Bad Debts (₹ 1,500) and New Provision (₹ 1,600). Credit surplus from Provision Account (₹ 3,400).