Why people should create a provision for doubtful debts?
Any organisation dealing with (a lot of) customers/clients may find it difficult to realise the entire money towards various goods sold/serices provided during the ordinary course of business. These customers/clients lie as ‘Debtors’ in the books of account after the Company has sold the goods or provided sevices to them. The non-realisation could be on account of various reasons for eg. bankruptcy of customers/clients, disputes or legal battle with them etc. And if the organisation, having aware of these facts, discloses the debtors at their full value in the books, it will amount to showing a wrong picture of the current assets as of a paticular date. This is why the debtors need to be discounted to the extent of their unrealisability to depict a correct picture of realisable debtors in the books. And this discounting is called as ‘Provision for bad and doubtful debts’. It requires mention here that the debtors are not written off fully in the books but are shown as follows: Debtors:
