6. Trade receivable Flashcards
Definition of trade receivables
Trade receivables are amounts owed by customers who bought goods and services from business on credit.
Explain why business estimates the amount of debts uncollectible with the support of an accounting theory.
According to prudence theory, assets and profits should not be overstated while liabilities and losses should not be understated. Hence business review its trade receivables and estimates the amount which may be uncollectible, by providing for allowance for impairment of trade receivables to deduct against the trade receivables so as not to overstate the assets and profit.
Explain with the support of the accounting theory, why is it necessary for a business to account for impairment loss on trade receivable?
Matching theory states that expenses incurred must be matched against income earned in the same financial period to determine the profit for the period. Hence it is necessary for business to record impairment loss of trade receivables, which is an expenses, to match with the income earned from selling goods to customers on credit in the same financial period to determine the profit for the period.
Explain what is “allowance for impairment of trade receivable” recorded?
It is an estimation of the debts uncollectible.
What are the objective evidence of trade receivables likely uncollectible?
- TR delaying payments
- TR not picking up calls / shop is closed
- Cheque given by TR is dishonored (rejected by the bank)
What is the journal entry to record creation of estimation of debts uncollectible?
Dr Impairment loss of TR (expense, hence Dr )
Cr Allowance for impairment of TR (contra asset – hence Cr)
What is the journal entry to record increase in estimation of debts uncollectible?
Dr Impairment loss of TR (expense + )
Cr Allowance for impairment of TR (contra asset – hence Cr) +
What is the journal entry to record decrease in estimation of debts uncollectible?
Dr Allowance for impairment of TR (-)
Cr Impairment loss of TR (-)
What is valuation method for trade receivables in the statement of financial position?
Trade receivables is valued after deduction of allowance for impairment of trade receivables to get the net worth of trade receivables. This is in accordance of prudence theory, so that trade receivables (an asset) is not overstated.
What is the double entries to write off a debt?
Dr Allowance for impairment of trade receivable(-)
Cr Trade receivable(-)
What is the double entries for partial payment of debts and writing off remaining debts?
e.g John owing business $800 went bankrupt. John paid 30 cents for every dollar owed. Business write off reminding debts
Dr Cash at bank 240
Cr Trade receivable, John 240
Dr Allowance for impairment of trade receivable 560
Cr Trade receivable, John 560
How to find change in allowance for impairment of TR?
Change in allowance for impairment of TR
= AFIOTR EFY - [AFIOTR SFY - debt written off]
DE for positive change in AFIOTR
Dr ILOTR
CR AFIOTR
DE for negetive change in AFIOTR
DR AFIOTR
CR ILOTR
From where do you get the figure to prepare sfper
From Change in AFIOTR
+ve write as impairment loss of trade receivable $XXX
or
-ve write reversal of impairment loss of trade receivable ($XXX)
