Methods of Accounting | NTA NET JRF Paper 2

Methods of Accounting

Basically there are two methods used for recording for bad and doubtful debts.

First Method
In the first method Provision for Bad and Doubtful Debts is created by debiting the Profit and Loss Account. Any bad debts arising in the subsequent years are adjusted against this Provision for Bad and Doubtful Debts.

Journal Entries in the First Year
1. When a provision is created for the first time.
Profit & Loss A/c  Dr.
To Provision for Bad and Doubtful Debts A/c

2. For bad debts after Trial Balance:
Bad Debts A/c Dr.

To Sundry Debtors A/c

3. For writing-off bad debts in the Profit & Loss Account
Profit & Loss A/c Dr.
To Bad Debts A/c (Trial Balance figure & Bad Debts after Trial Balance)

Journal Entries in the Second and Subsequent Years

1. For bad debts after Trial Balance:
Bad Debts A/c Dr.
To Sundry Debtors A/c

2. For writing-off bad debts in the Profit & Loss Account:
Provision for Bad and doubtful Debts A/c Dr.
To Bad Debts A/c

3. For creating necessary provision at the year end:
Profit & Loss A/c Dr.
To Provision for Bad and Doubtful Debts A/c

Second Method

Here bad debt is directly charged to Profit and Loss Account in the 1st year and in subsequent years as well. Provision to be created depends on the amount of provision at the beginning of the year.

Journal Entries in the First Year
1. For the bad debts of the period for which no entry has been made
Bad Debts A/c Dr.
To Sundry Debtors A/c

2. For writing–off bad debts in the Profit and Loss Account
Profit & Loss A/c Dr.
To Bad Debts A/c

3. When provision is created for the first time
Profit & Loss A/c Dr.
To Provision for Bad & Doubtful Debts A/c

Journal Entries in the Second and Subsequent Years

1. For the bad debts of the period for which no entry has been made
Bad Debts A/c Dr.
To Sundry Debtors A/c

2. For writing–off bad debts in the Profit & Loss Account:
Profit & Loss A/c Dr.
To Bad Debts A/c (Bad Debts during the year and after the Trial Balance)
3. For creating provision at the year end:
(a) (Closing provision > Opening provision

Profit &Loss A/c Dr.
To Provision for Bad and Doubtful Debts A/c
(b) (Closing provision < Opening provision)

Provision for Bad and Doubtful Debts A/c Dr.
To Profit & Loss A/c

 

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