What is meant by provision for discount on debtors?
Provision for discount on debtors refers to the estimated discount that a business enterprise is likely to allow to its customers in an accounting year. A business allows discount to its debtors to encourage prompt payments, and this anticipated discount is provided for in advance.
This provision is created only on good debtors, which are arrived at by deducting further bad debts and the provision for doubtful debts from the total debtors. The journal entry recorded is: Profit and Loss Account Dr. to Provision for Discount on Debtors Account.
In the balance sheet, this provision is shown as a deduction from debtors to portray correctly the expected realisable value of debtors. This adjustment reduces the current year's profit on account of probable discount on prompt payment.
Explanation
The answer draws directly from the textbook context which explains that provision for discount on debtors is created to account for discounts likely to be allowed for prompt payment. Key points covered: (1) Purpose - to encourage prompt payments, (2) Calculation basis - only on good debtors after deducting bad debts and provision for doubtful debts, (3) Journal entry - debit Profit and Loss Account, credit Provision for Discount on Debtors Account, and (4) Balance Sheet treatment - shown as deduction from debtors to reflect correct realisable value.