A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 34 - 34 of 93

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Question 34

Question

MCQ▾

Provision for discount on debtors shall be made on:

Choices

Choice (4)

a.

Book debts before incurring bad debt and before providing for bad debt

b.

Book debts before incurring bad debts after providing for bad debt

c.

Book debts after incurring bad debts but before providing for bad debt

d.

Book debts after incurring bad debt and after providing for bad debt

Answer

d.

Explanation

Provision for Discount on Debtors: It is a normal practice in the business to allow cash discount to those debtors from whom the payment is received promptly or within a fixed period. Discount thus allowed will be an expense of the business and is therefore debited to the Profit & Loss Account. As there will be debtors who will make early payment in the next accounting year and will be allowed such discount. A provision is created for such discount for the current year. The process of creating a provision for discount is the same as for the provision for doubtful debts. The following entry will be passed for this purpose:

Profit & Loss A/C

To, Provision for Discount on Debtors A/C

(Provision for discount created on good Debtors)

Treatment in Final Accounts: Such provision is shown on the debit side of the Profit & Loss Account and is also deducted from Sundry Debtors on the Assets side of the Balance Sheet.

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