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Hi,
I have confused myself and I'm hoping that someone can help!
If a company in a given financial year notices that they have bad debts - they write them off to a bad debt account and this is shown on the Trial Balance and the Profit and Loss account - ok, fine. Under the priciple of prudence they decide to make a provision for future doubtful debt - they allocate an amount or percentage from the asset of debtors to reduce the net assets of the company and the provision is shown on the Trial Balance and as an expense on the Profit and Loss account. Ok... I'm with it so far... that's the end of year 1.
In year 2 and subsiquent years - and this is where I get confused - the bad debts for the year are written off as before - an expense of business.. Why isn't the amount offset by the provision?
I mean - you have set aside some of the previous years assumed asset to cover a future liability of bad debt haven't you? Why isn't the assigned amount used?
When you look at reducing balance depreciation the provision amount is used - you take it from the initial value of the fixed asset before applying the percentage calculation to find the current years depreciation value... so why is the provision for doubtful debt not used in the same way?
Any help to understand this would be greatly appreciated!
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