Provision for doubtful debts


Provision for doubtful debts

There are two types of provisions; specific and general.

Specific provision
If an entity can identify customer accounts and amounts in those accounts which are doubtful then the figure of provision for doubtful debts can be supported by a list of names and balances that are doubtful.  This approach to provision where customer accounts are analyzed and accordingly provided for is known as specific provision. Specific provision is allowable for taxation purposes.

General provision
Most of the time businesses will be certain that some accounts will turn bad but it may not be possible to identify with certainty specific customer names and amounts that are doubtful. In this situation management will make an estimate of an amount to be provided for as doubtful.  Past experience is always helpful in making such an estimate. General provisions are not allowable for taxation purposes.

The following two methods are usually employed in estimation of an amount of general provision.

i)          Percentage of Debtors Method, and
ii)         Percentage of Sales Method

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