E T B Best PGDM Institute in Delhi PGDM Course in Delhi MBA AGU Best PGDM College in Delhi NCR Best MBA Colleges in Bangalore Best School in Noida Top Boarding School in Noida Top Boarding School in Delhi

Treatment of Provision for Bad Debts in Realisation A/c.

Reserve for bad debts is an expense for the business but sir you told me that we should record it on the credit side of Realisation A/c at the time of dissolution of a firm. Please clarify.

asked Dec 10, 2015 in Partnership-Fundamentals by pooja j (233 points) 3,002 views

1 Answer

0 votes
Provision or Reserve for bad debts is not an expense.  Please first understand what is the nature of a provision.  When we are uncertain about the amount or timing of any liability or expense, we set apart an estimated amount from the Profit & Loss A/c.  The journal entry for that is:

Profit & Loss A/c   Dr.

  To Provision for Bad Debts A/c

So when actual bad debts happen, they are not debited to Profit & Loss A/c but they are debited to Provisition for Bad Debts A/c, entry for that is:

Provision for Bad Debts A/c   Dr.

  To Bad Debts A/c

You may notice from above that Provision for Bad Debts has a credit balance. An account with  a credit balance is transferred to the credit side of any account. This is the reason it is transferred to the credit side of Realisation A/c at the time of dissolution.  An account with debit balance is always transferred to the debit side of another account.  For example Sr. Debtors A/c is a debit balance and that is transferred to the debit side of the Realisation.
answered Dec 10, 2015 by jbsclasses (3,971 points)
...