Section A: Theory of Financial Accounting
Question 1
Explain the following items and outline how they are treated in the final accounts:
- increase in provision for doubtful debts;
- decrease in provision for doubtful debts;
- provision for discount on debtors;
- provision for discount on creditors;
- provision for depreciation.
Observation
Few candidates attempted the question and the performance was below average. Many of them failed to provide adequate answers on how the items are treated in the final accounts. In the same vein, some lost valuable marks by misinterpreting the meaning of some of the items.
Some of the expected responses were:
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Increase in Provision for Doubtful Debts:
This occurs when the current year’s provision for doubtful debts is more than the previous year’s provision.
In the final accounts, increase in Provision for Doubtful Debts is debited to Profit and Loss Account; but in the Balance Sheet, the increase is added to any previous provision and the total subtracted from the debtors balance. -
Decrease in Provision for Doubtful Debts:
This occurs when the current year’s provision for doubtful debt is less than the previous year’s provision.
In the final accounts, decrease in provision for doubtful debts is credited to Profit and Loss Account; but in the Balance Sheet, it is deducted from the previous provision and the balance subtracted from the debtors total. -
Provision for Discount on Debtors:
This is a percentage calculated on the total amount of debtors after the deduction of provision for doubtful debts.
Provision for Discount on Debtors is debited to the Profit and Loss Account; but in the Balance Sheet, the amount provided is deducted from the debtor’s balance. -
Provision for Discount on Creditors:
This is a percentage calculated on the total amount of creditors.
In the final accounts, provision for discount on creditors is credited to Profit and Loss Account; but in the Balance Sheet the amount is deducted from the creditor’s total. -
Provision for Depreciation:
This is the provision made for the part of the cost of a fixed tangible/non-current asset consumed during its period of use by an organization. OR
It is the provision made for the reduction in the economic value of a fixed tangible/non-current asset as a result of wear and tear, usage, effluxion and passage of time.
In the final accounts, provision for depreciation is debited to Profit and Loss Account; but in the Balance Sheet it is deducted from the cost of the fixed tangible asset