Two methods used to estimate general provision


two methods are usually employed in estimation of an amount of general provision. These are;

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

Percentage of Debtors Method
At the end of the first year [Year 1] the amount of provision is established by applying the pre-determined percentage to the balance of total debtors.  An entry is then made to create a  provision.  At the end of the second year [Year 2], management will determine adequacy of the provision. The pre-determined percentage may change in such a revision. Again a percentage is applied to the balance of total debtors to establish the amount of provision required.  If the amount required for second year [Year 2] exceeds the balance in the provision account provision is increased to the required level.  If on the other hand the amount of provision required for second year [Year 2] is less than the balance in the provision account, provision is decreased to the required level.
 


Percentage of Sales Method

In this approach, bad debts it is argued, is an expense associated with selling on credit. Therefore, the matching concept is achieved better if bad debts would be estimated as a percentage of net credit sales.  This method therefore makes no reference to the debtors figure. Instead a percentage is applied to the credit sales figure at the end of every year and charged against profits to record provision for doubtful debts.

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