Adjustments in Final Accounts - Part 3

Objective of Content

In adjustments in Final Accounts, will treat provision for discount on creditors. After reading this content, you will understand, what is provision for discount on creditors, what its importance is, how to make provision for discount on creditors account and how to adjust it in final accounts?

Meaning of Provision for discount on creditors

If you are buyers of goods and you have bought goods on credit, it means you have to pay the amount of goods to your creditors. If you pay fastly, you may be right to get discount on your fast payment. It is called discount receivable. If the years are different, one year is belong to goods when we purchased and other year belongs to when we receive the discount. Now question is that in which year we show our discount income. Large number of accounting expert has given thought that we have to show discount income in that year when we buy the goods on credit. So, if some discount is receivable in the closing of year, we have to create its provision and this provision is called provision for discount on creditors.

Importance of Provision for discount on creditors

a) With this, we can show net receivable amount of discount in profit and loss account and our profit and loss account will show correct net profit or loss.

b) We can also analyze our net reserve by adjusting each receivable and payable provision.

Steps to make provision for discount on creditors account

Effect of provision for discount on creditors account in final accounts

A) In profit and loss account

Balancing figure of provision for discount on creditor account will be shown in profit and loss account.

B) In balance sheet

In balance sheet we will deduct new provision for discount on creditors from sundry creditors in current liabilities.

Related : Adjustments in Final Accounts - Part 2

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Accounting Education: Adjustments in Final Accounts - Part 3
Adjustments in Final Accounts - Part 3
Accounting Education
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