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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) 2,265 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)
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