Create a provision for discount on debtors and creditors

 

 What is the provision for discount on debtors?

The provision which is created on sundry debtors to allow a discount on receipt of cash from them in the next accounting period is called provision for discount on debtors. Generally, the discount is allowed on the trade debtors.

The balance of the debtor's account is an asset; because cash in realisable from the debtors. If they pay their debts before the date of the due date, they may claim discounts. Again, the discount may be allowed to debtors for prompt payment in a traditional way. The details of goods and services sold on credits in an accounting period are recorded in the debtors' account but the amount of debtors may not be realised in that accounting period. For this reason, efficient concern creates a provision for discounts on debtors at an estimated rate.

It is to be created by debiting the Profit & Loss account and crediting the provision for discount on debtors account.

It is recorded by the following journal entry.

PARTICULAR	AMOUNT	AMOUNT
Profit & Loss A/C……………………………… Dr.          To Provision for Discount on Debtors A/C (Being Provision for discount on debts provided for)	XXX	XXX

The amount of provision for discount on debtors, which is created according to the information in adjustments of final accounts is to be deducted from debtors in the assets side of the balance sheet. If the balance of provision for discount on debtors and the balance of debtors are given with ledger account balances, the provision for discount on debtors may be created in three methods, which are used in the case of provision for doubtful debts.

Again, if there is an information to write off bed debts from debtors, to creat a provision for doubtful debts and to creat a provision for discount on debtors, the provision for discount for discount on debtors will be created on the balance of debtors after deduction of above mentioned bed debts and provision for doubtful debts.

Example: The sundry Debtors stood at Rs. 5000 on 31 December 2020. Provision for discount on debtors is to be created @ 5 % and Rs. 250 was allowed for discount during the year. The provision for discount on debtors showed a credit balance of Rs. 200 on 1^st January 2020.

In the Books of ……………………….

JOURNAL ENTRY

DATE	PARTICULAR	AMOUNT	AMOUNT
2020 Dec. 31	Profit & Loss A/C………………Dr. To Discount Allowed A/C (Being balance of discount allowed transferred.)	250	250
2020 Dec. 31	Profit & Loss A/C ………………… Dr. To Provision for Discount on Debtors A/C (Being the additional amount required for provision for discount on debtors Rs. 5000@5% i.e. 250-200 charged to the profit & loss account.)	50	50

What is the provision for discount on creditors?

The provision which is created on creditors for discount, which is to be received on payment of cash in the next accounting period is called provision for discount on creditors.

The balance of creditors is the liability of a concern. The details of credit purchase of goods are recorded on the credit side of the creditors' account. the discount may be received on payment of cash to creditors. It is the income of the receiving person and is transferred to the profit & loss account. The balance is to be shown on the liability side of the balance sheet. In the next year, the discount may be received on payment of cash to credit. Then it will be the income of the present year but realised in the next accounting period. For this reason, many concerns want to create a provision for discounts on creditors. It is recorded by the following journal entry.

PARTICULAR	AMOUNT	AMOUNT
Provision for Discount on Creditors A/C…… Dr.          To Profit & Loss A/C (Being the amount required for the creation of provision for discount on creditors.)	XXX	XXX

The amount of provision for discount on creditors, according to the information in adjustment of the final accounts, is to be deducted from the sundry creditors in the ledger account balances and there is an information to creat a provision for discount on creditors in the adjustments entries.

Example: On the 1^st January 2020, the provision for discount on creditors was Rs. 5000 and the discount received during the year was Rs. 4000. The balance of creditors was Rs. 50000 on 31^st December 2020. The rate of provision for discount on creditors was fixed @ 12%.

In the Books of ……………………….

JOURNAL ENTRY 

DATE	PARTICULAR	AMOUNT	AMOUNT
2020 Dec. 31	Discount Received A/C………… Dr.             To Profit & Loss A/C (Being balance of discount allowed transferred.)	4000	4000
2020 Dec. 31	Provision for Discount on Debtors A/C..Dr.            To Profit & Loss A/C (Being the additional amount required for provision for discount on creditors Rs. 50000@12% i.e. 6000-5000 charged to the profit & loss account.)	1000	1000