At the time of admission of new partner Vasu, old partners Paresh and Prabhat had debtors of Rs. 6,20,000 and a provision for doubtful debts of Rs. 20,000 in their books. As per terms of admission, assets were revalued, and it was found that debtors worth Rs. 15,000 had turned bad and hence should be written off. Which journal entry reflects the correct accounting treatment of the above situation?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Bad Debts A/c Dr. 15,000, To Debtors A/c 15,000; and Provision for doubtful debts A/c Dr. 15,000, To Bad Debts A/c 15,000
A provision for doubtful debts is kept for the very purpose of absorbing debts that turn bad. Here the bad debts of Rs. 15,000 are less than the existing provision of Rs. 20,000, so the loss is met out of the provision and nothing is charged to the Revaluation Account.
Bad debts written off: Bad Debts A/c Dr. 15,000, To Debtors A/c 15,000
Bad debts set off against the provision: Provision for doubtful debts A/c Dr. 15,000, To Bad Debts A/c 15,000
Provision left = Rs. 20,000 − Rs. 15,000 = Rs. 5,000
Revaluation Account would be debited only if the bad debts were more than the provision, and then only with the excess.