Following is the Trial Balance of a firm as on 31-12-2022 :
| |
Rs |
Rs |
| Trade receivables |
25,00,000 |
|
| Provision for doubtful debts |
|
1,40,000 |
| Bad debts |
40,000 |
|
The additional bad debts during the year are Rs 2,00,000. The firm has a policy of maintaining a provision for doubtful debts equal to 10% of the trade receivables' balances. The total amount to be charged to Profit and Loss A/c (for the year ending 31-12-2022) for bad debts written off and provision created will be
Explanation:
Let’s break down the calculation and options:
- Bad debts already in Trial Balance: Rs 40,000
- Additional bad debts for the year: Rs 2,00,000
- Trade receivables after all bad debts are written off:
= Rs 25,00,000 (original) - Rs 2,00,000 (additional bad debts)
= Rs 23,00,000
- Required provision (10% of receivables as per policy):
= 10% of Rs 23,00,000 = Rs 2,30,000
- Existing provision (per Trial Balance): Rs 1,40,000
- Increment in provision:
= Rs 2,30,000 (required) - Rs 1,40,000 (existing)
= Rs 90,000
- Total to be charged to P&L:
= Bad debts (Rs 2,00,000 + Rs 40,000) + Increase in provision (Rs 90,000)
= Rs 2,40,000 + Rs 90,000
= Rs 3,30,000
Statement of options:
- Option 1: Rs 2,50,000 – Incorrect, ignores increase in provision OR bad debts error.
- Option 2: Rs 1,30,000 – Incorrect for the same reason.
- Option 3: Rs 90,000 – Incorrect, shows only increase in provision, not total charge.
- Option 4: Rs 3,30,000 – Correct. Considers all bad debts and increased provision.