If Provisions are liability and provisions are shown on liability side of balance sheet, then why provision for bad and doubtful debts is deducted from debtors, asset side, and not shown on liability side?
3 Replies
lokeshkumaar
(student)
(77 Points)
Replied 19 March 2016
Dear yogesh
Provision for doubtful debts by nature is a liability account. It is shown as a deduction from debtors for better presentation. Because to that extent the debtors are doubtful to be received. Same as prov for depreciation. In case of separate disclosure the balance sheet is unnecessarily overstated. Because the expected value of debtors to be received is only net of provisions
Max Payne
(employed)
(2574 Points)
Replied 20 March 2016
Different answer here.
Liabilities, provisions and contingent liabilities - which could result in outflow of economic resources (i.e., assets) of the enterprise - are governed by AS-29 issued by ICAI. This Accounting Standard requires you to make a provision by debiting the P&L and creating a correspoding liability. Thus you have provision for taxes, provisions for expenses, appearing on the liabilities' side on balance sheet.
But a provision for bad and doubtful debts is NOT A PROVISION FOR LIABILITY. It is a provision for reduction (i.e., diminution) in VALUE OF ASSETS. Such a provision for bad debts is not covered by AS-29 but by another accounting standard AS-4. A provision for loss in value of an asset is recognised by debiting P&L and creating provision, BUT ITS PRESENTATION IS TO REDUCE IT FROM THE ASSET. This could be attributed to
1. Proper presentation - you don't want to deceive people by showing high value of assets and then showing liability for loss. It could be misleading to a person unfamiliar with financial statements. Would impact ratios and analysis if misunderstood.
2. Requirement of Scedule III of the Companies Act, 2013 - Show provision for bad debts as reduction from Trade Receivables.
Hope this puts some logic in treatment.
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