Depreciation, Provisions and Reserves

As already stated that when business transaction takes place on credit basis, debtors account is created and its balance is shown on the asset-side of the balance sheet. These debtors may be of three types: Good Debtors are those from where collection of debt is certain. Bad Debts are those debtors from where collection of money is not possible and the amount of credit given is a certain loss. Doubtful Debts are those debtors who may pay but business firm is not sure about the collection of full amount from them.

In fact, as a matter of business experience, some percentage of such debtors are not likely to pay, hence treated as doubtful debts. To consider this possible loss on account of non-payment by some debtors, it is a common practice (and necessary also) to make a suitable provision for doubtful debts at the time of ascertaining true profit or loss. The provision for doubtful debts is usually calculated as a certain percentage of the total amount due from sundry debtors after deducting/writing-off all known bad debts. Provision for doubtful debts is also called ‘Provision for bad and doubtful debts’.

It is created by debiting the amount of required provision to the profit and loss account and crediting it to provision for doubtful debts account.