Provision for Discount on Debtors & Provision for Discount on Creditors

Provision for Discount on Debtors

In almost all the business there is always an effort to collect our payments from the debtors quickly so in order to promote quick payments from the debtors we offer they discount for all the early payment. Here all those debtors who clear their dues before their due dates are given some discount. It is advisable to charge this expenditure i.e. discount to debtors to the period in which sales has been made, so a provision is created in the same manner, as in case of provision for doubtful debts

No discount should be allowed on debts which have turned bad. Here the provision is created only on good debtors. So the amount of provision for discount should be calculated after deducting the provision for bad debts from sundry debtors.

Accounting Steps
(a) When provision is made for the first time (at the end of first year)
(i) for Discount Allowed –
Profit & Loss A/c Dr. (with the amount of actual discount)
To Discount Allowed A/c
(ii) For Provision for Discount on Debtors –
Profit & Loss A/c Dr. (with the amount of Provision
To Provision for Discount on Debtors A/c for Discount on Debtors)

(b) At the end of subsequent years
(i) for Discount Allowed –
Provision for Discount on Debtors A/c Dr. (with the amount of discount To Discount Allowed A/c allowed)

(ii) Then, the next year’s provision is estimated which is carried forward and the extra or excess provision is adjusted (against the old provision which is transferred to Profit & Loss Account. That is, the entry will be –
Profit & Loss A/c Dr. (with the amount of further provision)
To Provision for Discount on Debtors A/c

The Balance Sheet contains The Bad Debts (after Trial Balance), Provision for Bad and Doubtful Debts and Provision for Discount on Debtors as follows:
Balance Sheet as on…….
Less: Bad Debts
Less: Provision for Bad & doubtful Debts
Less: Provision for Discount on Debtors

Provision for Discount on Creditors

Just as we give discount to our debtors in the same way our creditors give us discount for any prompt payments. But whether this discount is considered as income in the period when purchases were made or the period when the payment is made when both belong to different accounting years. Therefore it should be treated as income in the period when the particular purchase was made. Hence, on the last date of accounting period if some amount is still payable to creditors, a provision should be made to account for it in the profit and loss account of that year when purchases are made. Following adjusting entry is passed for it:

Provision for discount on creditor’s a/c Dr.
To Profit and loss account

Accounting Steps
Accounting procedures are similar to provision for Discount on Debtors but the entries are converse.

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