What will be accounting entry for provision for doubtful debts and why its necessary.

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Accepted Answer

Provision for doubtful debts is an estimated amount set aside to cover potential losses from customers who may not pay their debts.

The accounting entry for provision for doubtful debts is a debit to the provision for doubtful debts account and a credit to the bad debt expense account.
This is necessary because it helps to accurately reflect the true value of accounts receivable on the balance sheet.
Without this provision, the accounts receivable balance would be overstated and could mislead investors and creditors.
For example, if a company has $100,000 in accounts receivable but estimates that $5,000 will not be collected, it would create a provision for doubtful debts of $5,000.
This provision would reduce the accounts receivable balance to $95,000 and the bad debt expense would be recorded as an expense on the income statement.
This ensures that the company is accounting for potential losses and is not overstating its financial position.

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