Solution 10.1

a)A provision is an adjustment made to the accounts to allow for a transaction or event that is likely to occur in the future.  A provision is carried in the accounts to ensure the financial statements comply with the accounting concepts.

 b)A provision for bad debts is an adjustment made to the accounts to adjust the debtors figure in the balance sheet a realistic figure representing the cash likely to be received in the future period taking into account non payment by some of the debtors.   

c)The provision for bad debts should be carried at €16,000 (debtors €320,000 x 5%)

d)    If the new provision is €16,000 and the old provision was €16,340 then a reduction in the provision of €340 is needed.  The affect on the profit and loss account will be an addition of €340 to profit.

e)The provision for discount should be €7,600 (debtors €320,000 – provision bad debts €16,000 x 25%).   The effect in the profit and loss will be an additional expense of €7,600 decreasing profit by the full amount of the provision as it is being created for the first time. 

f)      Balance sheet extract