9. RECEIVABLES AND IRRECOVERABLE DEBTS

Question 1

What is the double entry for a receipt of cash that was previously written off as bad debt?

Answer 1

Dr Cash

Cr Bad and Doubtful Debt Expense

Question 2

What is the double entry to set up an allowance for doubtful debt?

Answer 2

Dr Bad and Doubtful Debt Expense (P&L)

Cr Allowance for receivables (SFP)

Question 3

What is the double entry if doubtful debt is written off?

Answer 3

Dr Allowance for receivables (clear allowance)

Cr Receivables control account (decrease receivables)

Question 4

What is the double entry if doubtful debt is paid?

Answer 4

Dr Cash
Cr Receivables control account (remove receivable)

Dr Allowance for receivables
Cr Bad and Doubtful Debt Expense

Question 5

What is the double entry for the creation of the general allowance?

Answer 5

Dr Bad and Doubtful Debt Expense (P&L)

Cr Allowance for receivables (SFP)

Question 6

What is the impact on the P&L if there is an increase or decrease in allowance during the period?

Answer 6

Increase = expense, decrease = reduction in expense

Question 7

Pika found that one of his credit customers has a bad credit history and unsure if they can pay the debt. Which account should Pika record this debt?

a. capital account
b. income account
c. allowances for receivables account
d. receivables account

Answer 7

c. allowances for receivables

when we are doubtful that a debt will be paid, we need to create an account in which we record allowances for receivables. We include the allowance in the financial statement and deduct it form the total receivables

Question 8

Which of the following is true?

a. accruals are liabilities
b. accruals are income
c. accruals are assets
d. accruals are expenses

Answer 8

a. accruals are liabilities

(because they are money owed by a business)

Question 9

What is irrecoverable debt and how do we account for it?

Answer 9

Irrecoverable debt = bad debt, may not be retrieved

Double entry will be;

DR Irrecoverable debts expense account
CR Receivable account

Question 10

What is a doubtful debt and how do account for it?

Answer 10

May not pay all back so we need to create a “allowance for receivables”

DR Irrecoverable debts expense account
CR Allowance for receivables account

(note that on the SOFP, the allowance is netted off against the receivables balance so that the figure shown is net receivables)

Question 11

A decrease in allowance for receivables would result in;

a. an increase in liabilities
b. a decrease in working capital
c. a decrease in net profit
d. an increase in net profit

Answer 11

d. an increase in net profit