10: Bad and Doubtful Debts Flashcards
FRS 102 refers to impairment losses - what are other terms for this?
-bad and doubtful debts
-provisions for doubtful debts
As per FRS 102 and international accounting standards, what are debtors also referred to?
-receivables
When a business makes a sales, what are two things this can be?
-a cash sale - where the business raises an invoice for the goods/services which are sold for cash or cheque immediately
-a credit sale - where the business raises an invoice at the time when goods/services are supplied to the customer but receives payment at a later date
What is the accounting entry for a cash sale?
Dr Bank
Cr Sales
(with sales revenue)
What is the accounting entry for a credit sale
Dr Debtors
Cr Sales
(with sales revenue)
What does the debit balance on a debtor’s account represent?
-represents an asset
-it is the right to receive cash in the future (trade debtor/trade receivable)
-No effect on cash as not yet paid, but cash balance will increase upon payment
What are two situation to be considered when a sale on credit is made?
-Bad debt
-Doubtful debt
What is a bad debt?
Bad debt arises when a debtor is unable or unwilling to pay the invoice
What is a doubtful debt?
When a debt becomes uncertain:
-if there are many debtors, a proportion may never be received
-press info may hint at possible bankruptcy or insolvency of a customer
-if unpaid over a considerable period of time (over normal settlement dates), the debt is uncertain
What is the accounting entry for bad debts and explain the rational behind this
Dr Bad debts account (P&L account)
Cr Debtors (Balance sheet)
-if know with some certainty the debtor will not pay, need to remove debt from business books
-the loss of debt is an expense to the business and is charged to the P&L account
-Sales are not reduces as the sale itself was good
What is the accounting entry for provision of doubtful debts and explain rational
Dr Bad debts expense
Cr Provision for doubtful debts
(with required provision for specific debts considered doubtful)
-if doubtful whether a debt will be recovered, debit stays as an asset in the business’s books but an impairment is created against it
Explain the accounting entries when the provision of doubtful debts is altered
-provisions are reviewed each year to determine whether it is at the right level
-if provision is adequate, an increase is needed alongside new calculations
How can we reflect an INCREASE/DECREASE in the provision for doubtful debts?
-Increase:
Dr Bad debts expense account
Cr provision for doubtful debts account
-Decrease:
Dr provision for bad debts account
Cr bad debts expense account
Explain the recovery of a debt which has previously been written off
-debt as been anticipated to be bad and has been written off from the accounts and taken loss suffered through P&L account
-ultimate receipt of cash can be considered as extra profit
Dr Bank account
Cr Bad debts expense account
Explain the recovery of a debt which has previously been provided against
Original debtor remains recorded in business’s books at full value even through provision made against it
-to reflect the debtor has paid, we:
1. record the cash received as:
Dr Bank account
Cr Debtors account
2. Calculate closing provision required by reviewing debtors account (more info in book!)
