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Class 11
Accountancy
Depreciation, Provisions and Reserves
what are lsquo provisions rsquo how are they cr...

Question:
What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.

Answer:

According to the Companies Act the term ‘Provision’ refers to any of the following amounts :-

(a) The amount written off or retained by way of providing for depreciation renewals or diminution in value of assets; or
(b) The amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

E.g. A trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism.

Therefore, the trader creates a provision for doubtful debts to take care of expected loss at the time of realization from debtors. In a similar way, provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets.

Examples of provisions are:-

(i) Provision for depreciation
(ii) Provision for bad and doubtful debts
(iii) Provision for taxation
(iv) Provision for discount on debtors
(v) Provision for repairs and renewals

Accounting Treatment for Doubtful Debts : First of all the amount of expected bad debts is ascertained which is posted in the debit side of P&L Account as new provision for doubtful debts is greater than new one, it will be shown in the credit side of P&L account and if the new provision is greater than the old one, the balance amount will be shown in the debit side of the P&L account. After that the amount of new provision will be deducted from the debtors figure in the assets side of the balance sheet.

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Popular questions of class 11 Accountancy

Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.

From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.

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(b) Internal users are the ..................... of the business entity.
(c) A ..................... would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ..................... in issuing financial reports to users.
(e) ..................... users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevent if it is ......................
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(i) If a firm believes that some of its debtors may ′default′, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept.
(iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.
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(vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of ________ concept.

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Question:
What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.

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Question: What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.

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Question:
What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.