Provision for Discount on Debtors is created to settle up the amount of discount that the business will be offering to its debtors at the time of making the payment in the future. Discount is provided to the debtors to make payments as early as possible.
Adjustment:
A. If Provision for Discount on Debtors is given outside the trial balance:
In such a case, two effects will take place:
- Provision for Discount on Debtors is shown on the Dr. side of the Profit & Loss A/c.
- Amount of Provision for Discount on Debtors is deducted from the Debtors in the Assets side of the Balance Sheet.
B. If Provision for Discount on Debtors is given inside the trial balance:
If Provision for Discount on Debtors is given in the trial balance, it will be recorded only once on the Debit side of the Profit and Loss A/c.
Illustration:
Following are some of the balances that appear in the books of Mr Haider.
The following adjustments have to be made:
1. Further bad debts amount to ₹2,500, Provision for Bad debts to be made at 5%, Provision for Discount to debtors @2%.
2. Goods are given away as charity amounting to ₹10,000.
3. Goods drawn for personal use ₹5,000.
4. Goods amounting to ₹15,000 were destroyed by fire and the insurance company admitted the claim for only ₹10,000.
5. Closing Stock amounts to ₹10,000
Solution: