EPFO APFC 2023 General Studies · Question 78 of 120

Correct — D, (d) ₹ 3,30,000. Work through the adjustment in the order the textbooks use. First, the further bad debts of ₹ 2,00,000 have not yet been recorded, so they must be written off against trade receivables: 25,00,000 less 2,00,000 leaves a balance of ₹ 23,00,000. Second, the closing provision is struck on that reduced balance, because a provision is an estimate of what will prove uncollectible out of the debts still standing, and debts already written off are no longer standing. Ten per cent of 23,00,000 is ₹ 2,30,000. Third, add up what the profit and loss account has to bear. The bad debts written off during the year come to ₹ 2,40,000 — the ₹ 40,000 already appearing in the trial balance plus the ₹ 2,00,000 written off now. The new provision to be carried forward is ₹ 2,30,000. Against these stands the provision of ₹ 1,40,000 created last year and still on the books, which is available to absorb this year's losses. The charge is therefore 2,40,000 plus 2,30,000 less 1,40,000, which is ₹ 3,30,000. The same result falls out of the provision for doubtful debts account without any separate reasoning. On the debit side put the bad debts of ₹ 40,000, the further bad debts of ₹ 2,00,000 and the closing balance of ₹ 2,30,000, giving ₹ 4,70,000. On the credit side put the opening balance of ₹ 1,40,000; the balancing figure needed to complete the account is ₹ 3,30,000, and that balancing figure is the amount transferred to the profit and loss account. Ruling the account is the safer method under time pressure, because it makes it impossible to forget the opening provision or to leave out one of the two bad debt figures.

• (a)₹ 2,50,000 — This is ten per cent of ₹ 25,00,000, the trade receivables figure as it stands in the trial balance before the further bad debts are written off. It is wrong on two counts at once. As a provision it is overstated, because ₹ 2,00,000 of those receivables have ceased to be receivables and cannot also be provided against; providing for a debt that has already been written off charges the same loss twice. And even if the figure had been right, it would still not be the answer, because the question asks for the total charged to the profit and loss account, which combines the bad debts written off with the movement in the provision. The sequence matters and is worth fixing: write off first, then compute the provision on what remains, then charge the difference. Reversing the first two steps produces this option.
• (b)₹ 1,30,000 — This is the increase in the provision, ₹ 2,30,000 less ₹ 1,40,000, which is ₹ 90,000, added to the ₹ 40,000 of bad debts already shown in the trial balance. In other words it is the correct calculation with the ₹ 2,00,000 of further bad debts left out of the charge — although, tellingly, those same ₹ 2,00,000 have been used to reduce the receivables to ₹ 23,00,000 for the purpose of computing the provision. That inconsistency is the signature of this error: the adjustment has been allowed to affect the balance sheet but not the profit and loss account. Every adjustment entry has two effects, and a bad debt written off reduces the asset and charges the expense in the same movement. If an adjustment shows up on only one side of your working, something has been missed.
• (c)₹ 90,000 — This is the increase in the provision alone — the closing provision of ₹ 2,30,000 less the opening provision of ₹ 1,40,000 — with all the bad debts written off during the year ignored. It answers the question how much more provision is needed, which is a real and useful figure, but not the question asked. The charge to the profit and loss account has two components: the debts that have actually gone bad and been written off, and the movement in the estimate against the debts that remain. Only when no debts have been written off during the year does the charge reduce to the movement in the provision, and that is not this case. Read the stem's wording closely; it asks for the total for bad debts written off and provision created, which names both components explicitly.

Two related accounts govern the treatment of doubtful trade receivables. Bad debts are amounts now regarded as irrecoverable; they are written off, removing the debt from trade receivables and charging the loss. The provision for doubtful debts is an estimate of further losses expected from the debts that remain, created at the year end so that the profit of the year in which the sales were made bears the cost of the debts that will not be collected. Because it is an estimate carried forward, only the movement in the provision affects the profit and loss account: the opening provision is already there to absorb losses, so the charge for the year is the bad debts written off, plus the closing provision, less the opening provision. In balance sheet presentation the provision is deducted from trade receivables to give a net figure — here ₹ 23,00,000 less ₹ 2,30,000, that is ₹ 20,70,000. Order of operations is critical: further bad debts revealed by the adjustments are written off first, and the percentage is then applied to the reduced balance, never to the gross figure. Where the opening provision exceeds what is needed, the same arithmetic runs in reverse and produces a credit to the profit and loss account rather than a charge. A discount provision on debtors, where one is required, is computed after the doubtful debts provision has been deducted, on the same principle that one does not provide against amounts that are already gone.

The accountancy block of this paper alternates between conceptual items and short computations of this kind, and the computations are always presented as a fragment of a trial balance with one or two adjustments below it. Reading the fragment is part of the test. The table here has an unlabelled first column and two amount columns headed only with the rupee sign, with no words distinguishing debit from credit, so the candidate has to place each item from its nature: trade receivables and bad debts are debits and the provision for doubtful debts, being a contra to an asset, is a credit. That the provision sits in the second column is the confirmation that it is the opening provision brought forward rather than a charge for the year. The option set is then constructed so that every wrong answer is a genuine intermediate figure from the correct working — the closing provision computed on the wrong base, the increase in the provision alone, and the increase plus one of the two bad debt amounts. That construction makes it dangerous to stop as soon as a number matches an option. The examination-hall safeguard is to rule the provision account rather than to add figures in the head, because an account will not balance if a component has been left out, whereas a mental sum will happily produce a plausible wrong total.

• The amount charged to the profit and loss account for doubtful trade receivables is the bad debts written off during the year, plus the closing provision required, less the opening provision already carried in the books.
• Further bad debts disclosed by the adjustments are written off against trade receivables before the closing provision is computed, so the percentage is applied to the reduced balance and never to the gross figure.
• On these figures the receivables fall from ₹ 25,00,000 to ₹ 23,00,000, the closing provision at ten per cent is ₹ 2,30,000, the bad debts for the year are ₹ 2,40,000, and the charge is 2,40,000 plus 2,30,000 less 1,40,000, that is ₹ 3,30,000.
• Ruling the provision for doubtful debts account gives the same answer as a balancing figure: debits of ₹ 40,000, ₹ 2,00,000 and ₹ 2,30,000 against an opening credit of ₹ 1,40,000 leave ₹ 3,30,000 to be transferred to the profit and loss account.
• In the balance sheet the provision is shown as a deduction from trade receivables, giving a net figure of ₹ 23,00,000 less ₹ 2,30,000, that is ₹ 20,70,000.
• Where the opening provision exceeds the closing provision plus the bad debts written off, the same computation produces a credit to the profit and loss account instead of a charge.

• Applying the percentage to the trial balance figure of trade receivables instead of to the balance remaining after the further bad debts have been written off
• Forgetting the opening provision, so that the whole closing provision is charged to the profit and loss account rather than only the movement in it
• Omitting one of the two bad debt figures; both the amount already in the trial balance and the further amount in the adjustments form part of the charge
• Reporting an intermediate figure such as the closing provision or the increase in the provision, each of which appears as an option here
• Misreading the trial balance columns, which are headed only with the rupee sign; the provision appearing in the second column is what identifies it as an opening credit balance

The paper's accountancy computations are built from a three or four line extract of a trial balance with one or two adjustments beneath it, and they are set so that the arithmetic is short but the sequence of steps is unforgiving. Doubtful debts, depreciation, closing stock valuation and outstanding or prepaid expenses are the recurring topics. Every wrong option is an intermediate figure that the correct working itself produces, so a candidate who checks only whether the answer appears in the list will be caught. The reliable approach is to write the relevant ledger account, since it enforces the completeness that mental arithmetic does not, and then to read the stem's final clause again to confirm which figure is wanted — the charge for the year, the closing provision, or the net figure to appear in the balance sheet.

No directly related past PYQ was found.

• practice — not a real PYQ

  A firm's trade receivables stand at ₹ 4,00,000 and the provision for doubtful debts brought forward is ₹ 30,000. Further bad debts of ₹ 20,000 are to be written off and a provision of 5% is to be maintained on trade receivables. What amount will be charged to the Profit and Loss Account?

  • (a)₹ 9,000
  • (b)₹ 19,000
  • (c)₹ 20,000
  • (d)₹ 39,000

  Answer(a) ₹ 9,000 — receivables fall to ₹ 3,80,000 after the further write-off, so the closing provision at five per cent is ₹ 19,000. The charge is the bad debts of ₹ 20,000 plus the closing provision of ₹ 19,000 less the opening provision of ₹ 30,000, which is ₹ 9,000. The figures of ₹ 19,000 and ₹ 20,000 are the closing provision and the bad debts taken on their own, each an intermediate step rather than the answer.

• practice — not a real PYQ

  In preparing final accounts, the provision for doubtful debts required at the year end is calculated on

  • (a)trade receivables as shown in the trial balance
  • (b)trade receivables after deducting further bad debts given in the adjustments
  • (c)total sales for the year
  • (d)trade receivables after deducting the opening provision

  Answer(b) trade receivables after deducting further bad debts given in the adjustments — a provision is an estimate of losses expected from debts still outstanding, so debts already written off are excluded from the base. Computing the provision on the trial balance figure charges the same loss twice, and deducting the opening provision from the receivables confuses a contra item in the balance sheet with the base on which the new estimate is struck.