Bad debts Provision--Excess and Fresh

Hi Mr Devarajan and Pramod Ji,

Mr Shanavas's client hasn't made an ad hoc provision. An ad hoc provision is made for the debtors in general; we don't identify particular receivable accounts that require provisioning. In this case, provision was made for two specific debtors—A and B. My point is that consequent to some more information becoming available about the collectability of Debt B in the CURRENT year, the management feels the need to provide an additional provision, So, shouldn't this additional burden be provided out of current year's profits? Although, it's not really a "burden" since a similar amount has also been unlocked from the previous year's provision and credited to P & L account. You're saying that since we have a provision brought forward already, what's the fun of writing it back and then providing for a similar amount again? You're looking at the issue from an arithmetic point of view. I am looking at it from a purely accounting and presentation perspective. I think good presentation requires that we make a fresh provision of Rs 2.50 lacs after writing back the old Rs 2.50 lacs. If we don't, readers of financial statements won't know the exact state of realizability of debtors. The management had some doubts about the realization of certain debts in the past years; those doubts have persisted even in this year, and additional provision has been created as more information has come to light. The fear that we may lose Rs 12.50 lacs instead of Rs 10 lacs that we'd suspected earlier has to be reflected in the financial statements of this year to let the readers know the true state of affairs. Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Devarajan.V" wrote:>> Sanjeevji,> Is it necessary to show the excess provision written back and fresh> provision made separately? In most of the cases only the net is shown in the> P & L a/c.> CA Devarajan.V > > Hi Shanavas,> > You are left with an excess provision of Rs 2.50 lacs in respect of > Debtor A. This needs to be written back. It may be credited to > Miscellaneous Income or some other such head in the P & L account. > Don't forget to exclude it when you prepare the computation of > income—since provision was never allowed as an expense, its write-> back can't be treated as an income either.> > You haven't said what the current status of realization of Debtor B > is. You've already got a provision of one million against B's debt > of two millions. If the management feels an additional cushion of Rs > 2.50 lacs is needed, then certainly Rs 2.50 lacs unlocked from Debt > A can be redeployed against potential short-realization of Debt B. > But still, the amount of Rs 2.50 lacs should first be credited to > the P & L account. It won't make any difference arithmetically, but > proper presentation would require that Rs 2.50 be credited to the > Income account and a fresh Rs 2.50 be set aside from current year's > profits to meet the suspected shortfall in realization of Debt B. > The fact that Rs 10 lacs is not enough and a little more is needed > was determined in the current year. So it has to be reflected that > way in the financial statements. > > As far as provisions for bad debts are concerned, although there is > no one-to-one co-relation between a debt and a provision, each year > is a fresh year. As more information becomes known about a debtor > and the quantum of possible loss, provision for doubtful debts > should be determined afresh each year. Excess of an earlier year > should be written back; extra if required ought to be provided out > of current year's profits. > > Also, make sure you don't report the write back as cessation of > trading liability u/s 41(1) in Tax Audit. Fresh provision shouldn't > also be reported as a contingent liability debited to P & L account > in Form 3CD. > > Thanks,> > CA Sanjeev Bedi> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, Shanavas > wrote:> >> > Dear all,> > > > Good day to everybody... .........> > > > I request help from the respected members of the group on the > following matter.> > > > Auditors have classified two sundry debtors as bad and doubtful > debt during the audit of year 2004-05.The position is as under> > > > > A B> > > > Outstanding amount 2004-05 > 1,000,000.00 2,000,000.00> > Provision made 2004-05 > 500,000.00 1,000,000.00> > > > During the year 2007-08, we have recieved full and final > settlement through court, amounting Rs. 750,000.00 against the > Sundry debtor-A.> > > > Could you please advise me regarding accounting treatment.> > > > Also, advise me whether we can adjust the excess amount of > Rs.250,000.00 against the remaining amount of Sundry debtor-B, > instead of crediting in Profit or Loss Account.> > > > Thanks> > > > Shanavas