harini saha (Student CMA) (90 Points)
15 May 2020
yasaswi gomes
(My grammar is 💯 good I)
(7290 Points)
Replied 15 May 2020
Debtors are receivables, Creditors are payables. If you get a discount on payables, it is a gain. You can provide for it only when your sure that the economic benefit (gain from discount) will inflow into the firm. Based on past experience, you can create a provision this year because, you received a discount last year as % on Sundry creditors (Reliable estimate) and your sure that you will receive it this year as well.
If you are uncertain and if it is possible that chances are below 50% to get a discount, and when there is no realisable estimate as to how much discount you might obtain, you can create a contingent asset as per Provisions accounting standard.
harini saha
(Student CMA)
(90 Points)
Replied 15 May 2020
yasaswi gomes
(My grammar is 💯 good I)
(7290 Points)
Replied 15 May 2020
‘Contingent assets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs.’
From this principle, I have derived this assumption that a provision can be created. When it comes to Prudence, this concept doesn’t allow creating excessive provisions. Your correct and people should be cautious while creating extra provision for this kind as this could overstate assets and understate liabilities. But since you know and read about Provision for doubtful debts, where receivables are credited and Provision for doubtful debt is debited on the asset side, I believe, you can create a provision for creditors discount similarly.
Whether to, or not to, exercise this principle to create a provision (Probable economic benefit inflow) for discount is clearly not stated in this chapter apart from recognising it as an asset. If I were to make the judgement, and if my superiors need more clarity, then I will pass on this entry.
Provision for Discount on creditors a/c 100₹ Asset
To P&L a/c
(100₹ provision on discount)
https://www.mca.gov.in/XBRL/pdf/framework_fin_statements.pdf
yasaswi gomes
(My grammar is 💯 good I)
(7290 Points)
Replied 15 May 2020
It could also mean that, in the journal entry, it is debited to payables, hence a liability. Hence, I don’t have any Indian GAAP clarity on this issue.
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