Bad Debts, Provision for Doubtful Debts, and Discount on Debtors

Bad debts, provision for doubtful debts, and discount on debtors look confusing because all three are connected to the same thing: money receivable from customers.

But they are not the same.

Bad debts are amounts the business is sure it will not receive. Provision for doubtful debts is an estimate for amounts that may not be received. Discount on debtors is a possible discount given to good customers who pay promptly.

Once you see this difference, the journal entries become much easier.

Let us build the topic slowly with entries, final accounts treatment, and a solved example.

First Understand Debtors

Debtors are customers who owe money to the business because goods or services were sold to them on credit.

For example, if goods worth Rs. 20,000 are sold to Ravi on credit, Ravi becomes a debtor of the business.

The entry for credit sale is:

Particulars	Debit	Credit
Ravi A/c Dr.	Rs. 20,000
To Sales A/c		Rs. 20,000

This means the business expects to receive Rs. 20,000 from Ravi.

But in real life, every debtor may not pay. Some may fail completely, some may become doubtful, and some may pay early only if they receive a discount. That is where this topic begins.

Bad Debts Meaning

A bad debt is a debt that has become irrecoverable.

In simple words, the business no longer expects to receive that amount from the debtor. Since the amount will not be collected, it becomes a loss for the business.

Suppose Ravi, who owed Rs. 20,000, becomes insolvent and the business cannot recover Rs. 3,000 from him. That Rs. 3,000 is bad debt.

The entry is:

Particulars	Debit	Credit
Bad Debts A/c Dr.	Rs. 3,000
To Ravi A/c		Rs. 3,000

Why is Bad Debts Account debited?

Because bad debts are a loss.

Why is the debtor credited?

Because the amount receivable from that debtor is reduced.

Bad Debts in Profit and Loss Account and Balance Sheet

Bad debts are shown on the debit side of Profit and Loss Account because they are a loss.

Debtors are reduced in the Balance Sheet because the business can no longer show that amount as receivable.

Item	Treatment
Bad debts	Debit side of Profit and Loss Account
Debtors	Reduced by the amount written off

If bad debts are already given in the trial balance, they have already been recorded in the books. In that case, show them in Profit and Loss Account.

If further bad debts are given as an adjustment outside the trial balance, pass the adjustment entry and also deduct them from debtors in the Balance Sheet.

Further Bad Debts Entry

Further bad debts are bad debts discovered after preparing the trial balance but before preparing final accounts.

Suppose debtors are Rs. 60,000 and the adjustment says:

Further bad debts Rs. 2,000.

The entry is:

Particulars	Debit	Credit
Bad Debts A/c Dr.	Rs. 2,000
To Debtors A/c		Rs. 2,000

In final accounts:

Place	Treatment
Profit and Loss Account	Add further bad debts to bad debts
Balance Sheet	Deduct further bad debts from debtors

This deduction must happen before calculating provision for doubtful debts.

Provision for Doubtful Debts Meaning

Provision for doubtful debts is an amount kept aside for debtors who may not pay in future.

It is not linked to one confirmed debtor in the same way as bad debts. It is an estimate.

For example, a business may have debtors of Rs. 80,000 at the end of the year. Based on past experience, it may expect that about 5 percent of these debtors may not pay. So it creates a provision for doubtful debts.

Provision for doubtful debts = Rs. 80,000 x 5 percent
Provision for doubtful debts = Rs. 4,000

The entry for creating provision is:

Particulars	Debit	Credit
Profit and Loss A/c Dr.	Rs. 4,000
To Provision for Doubtful Debts A/c		Rs. 4,000

The Profit and Loss Account is debited because the expected loss belongs to the current year.

The Provision for Doubtful Debts Account is credited because it is kept as a provision against debtors.

Why Provision Is Created

Provision is created because profit should not be overstated.

If a business knows from experience that some debtors may not pay, it should not show the full debtor balance as if every rupee is certain to be collected.

This is also why provision for doubtful debts is connected with the idea of careful accounting. Expected losses are recognised early so that the profit and financial position look realistic.

How to Calculate Provision for Doubtful Debts

Use this order:

1. Start with debtors.
2. Deduct further bad debts, if any.
3. Calculate the new provision on the remaining debtors.

For example:

Debtors = Rs. 50,000
Further bad debts = Rs. 1,000
Provision for doubtful debts = 5 percent

First deduct further bad debts:

Adjusted debtors = Rs. 50,000 - Rs. 1,000
Adjusted debtors = Rs. 49,000

Now calculate provision:

New provision = Rs. 49,000 x 5 percent
New provision = Rs. 2,450

The new provision is calculated on Rs. 49,000, not on Rs. 50,000.

If Old Provision Is Given

Sometimes the trial balance already contains Provision for Doubtful Debts. This is the old provision brought forward from last year.

In that case, do not simply debit the new provision to Profit and Loss Account without checking the old provision.

The usual school-level Profit and Loss Account treatment is:

Bad debts
Add: Further bad debts
Add: New provision for doubtful debts
Less: Old provision for doubtful debts

If the total is positive, it is shown on the debit side of Profit and Loss Account.

If the old provision is more than the total requirement, the excess is credited to Profit and Loss Account.

Calculation:

Bad debts = Rs. 1,500
Add: Further bad debts = Rs. 1,000
Add: New provision = Rs. 2,450
Total = Rs. 4,950
Less: Old provision = Rs. 2,000
Amount debited to Profit and Loss Account = Rs. 2,950

Balance Sheet Treatment of Provision for Doubtful Debts

Provision for doubtful debts is deducted from debtors on the assets side of the Balance Sheet.

Format:

Particulars	Amount
Debtors	Rs. 50,000
Less: Further bad debts	Rs. 1,000
	Rs. 49,000
Less: Provision for doubtful debts	Rs. 2,450
Net debtors	Rs. 46,550

The important point is that the Balance Sheet shows debtors at a more realistic amount.

Discount on Debtors Meaning

Discount on debtors means discount allowed to customers for early or prompt payment.

There are two situations you may see in questions:

Situation	Meaning
Discount allowed already given	Actual discount has already been allowed
Provision for discount on debtors	Expected discount may be allowed in future

Actual discount allowed is an expense.

The entry is:

Particulars	Debit	Credit
Discount Allowed A/c Dr.
To Debtors A/c

Then Discount Allowed Account is transferred to Profit and Loss Account.

For provision for discount on debtors, the entry is:

Particulars	Debit	Credit
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c

How to Calculate Provision for Discount on Debtors

Provision for discount on debtors is not calculated on all debtors.

It is calculated on good debtors.

Good debtors means debtors left after deducting:

1. Further bad debts
2. Provision for doubtful debts

Use this order:

Debtors
Less: Further bad debts
Less: Provision for doubtful debts
= Good debtors

Then calculate provision for discount on those good debtors.

For example:

Debtors = Rs. 50,000
Further bad debts = Rs. 1,000
Provision for doubtful debts = Rs. 2,450
Provision for discount on debtors = 2 percent

Good debtors:

Rs. 50,000 - Rs. 1,000 - Rs. 2,450 = Rs. 46,550

Provision for discount:

Rs. 46,550 x 2 percent = Rs. 931

Complete Solved Example

Let us solve one full adjustment.

Trial balance information:

Item	Amount
Debtors	Rs. 50,000
Bad debts	Rs. 1,500
Provision for doubtful debts	Rs. 2,000

Adjustments:

Further bad debts Rs. 1,000.
Create provision for doubtful debts at 5 percent.
Create provision for discount on debtors at 2 percent.

Step 1: Deduct Further Bad Debts

Debtors = Rs. 50,000
Less: Further bad debts = Rs. 1,000
Adjusted debtors = Rs. 49,000

Step 2: Calculate New Provision for Doubtful Debts

New provision = Rs. 49,000 x 5 percent
New provision = Rs. 2,450

Step 3: Calculate Provision for Discount on Debtors

First find good debtors:

Good debtors = Adjusted debtors - Provision for doubtful debts
Good debtors = Rs. 49,000 - Rs. 2,450
Good debtors = Rs. 46,550

Now calculate discount provision:

Provision for discount = Rs. 46,550 x 2 percent
Provision for discount = Rs. 931

Step 4: Show Profit and Loss Account Treatment

Particulars	Amount
Bad debts	Rs. 1,500
Add: Further bad debts	Rs. 1,000
Add: New provision for doubtful debts	Rs. 2,450
Less: Old provision for doubtful debts	Rs. 2,000
Amount debited to Profit and Loss Account	Rs. 2,950
Provision for discount on debtors	Rs. 931

So the total debit to Profit and Loss Account for these items is:

Rs. 2,950 + Rs. 931 = Rs. 3,881

Step 5: Show Balance Sheet Treatment

Assets	Amount
Debtors	Rs. 50,000
Less: Further bad debts	Rs. 1,000
	Rs. 49,000
Less: Provision for doubtful debts	Rs. 2,450
	Rs. 46,550
Less: Provision for discount on debtors	Rs. 931
Net debtors	Rs. 45,619

This final figure, Rs. 45,619, is shown as debtors in the Balance Sheet.

Journal Entries Summary

Here are the main entries in one place.

For Bad Debts

Particulars	Debit	Credit
Bad Debts A/c Dr.
To Debtors A/c

For Transfer of Bad Debts to Profit and Loss Account

Particulars	Debit	Credit
Profit and Loss A/c Dr.
To Bad Debts A/c

For Creating Provision for Doubtful Debts

Particulars	Debit	Credit
Profit and Loss A/c Dr.
To Provision for Doubtful Debts A/c

For Actual Discount Allowed to Debtors

Particulars	Debit	Credit
Discount Allowed A/c Dr.
To Debtors A/c

For Creating Provision for Discount on Debtors

Particulars	Debit	Credit
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c

Common Mistakes to Avoid

The topic becomes difficult mainly because students calculate in the wrong order.

Here are the mistakes to watch for:

Mistake	Correct approach
Calculating provision for doubtful debts on original debtors	Deduct further bad debts first
Calculating discount on original debtors	Calculate discount only on good debtors
Forgetting old provision	Deduct old provision while finding the Profit and Loss Account charge
Showing further bad debts only in Profit and Loss Account	Also deduct further bad debts from debtors
Treating doubtful debts as confirmed bad debts	Doubtful debts are estimated, not certain

A Quick Memory Rule

Use this simple sentence:

Bad debts are gone.
Doubtful debts may go.
Discount is for those who are likely to pay.

That is the whole logic.

Bad debts reduce debtors immediately.

Provision for doubtful debts protects the business against expected non-payment.

Provision for discount on debtors is calculated only after removing doubtful amounts because discount is expected on good debtors.

FAQs

What is the difference between bad debts and doubtful debts?

Bad debts are confirmed losses. The business is sure that the amount will not be recovered. Doubtful debts are not yet confirmed losses, but there is a chance that some debtors may not pay, so a provision is created.

What is the journal entry for bad debts?

The entry is:

Particulars	Debit	Credit
Bad Debts A/c Dr.
To Debtors A/c

Bad Debts Account is debited because it is a loss. Debtors Account is credited because the amount receivable is reduced.

Is provision for doubtful debts an expense?

Provision for doubtful debts is treated as a charge against profit. It is debited to Profit and Loss Account and deducted from debtors in the Balance Sheet.

On which amount is provision for doubtful debts calculated?

It is calculated on debtors after deducting further bad debts. If debtors are Rs. 50,000 and further bad debts are Rs. 1,000, provision is calculated on Rs. 49,000.

Why is old provision deducted in Profit and Loss Account?

Old provision was already created in an earlier year. So while finding the current year’s charge, it is adjusted against bad debts, further bad debts, and the new provision required.

On which amount is provision for discount on debtors calculated?

Provision for discount on debtors is calculated on good debtors. That means debtors after deducting further bad debts and provision for doubtful debts.

What comes first, provision for doubtful debts or discount on debtors?

Provision for doubtful debts comes first. Discount on debtors is calculated after that because discount is expected only from debtors who are likely to pay.

Where are these items shown in final accounts?

Bad debts, further bad debts, provision for doubtful debts, and provision for discount on debtors are shown in Profit and Loss Account. In the Balance Sheet, debtors are reduced by further bad debts, provision for doubtful debts, and provision for discount on debtors.