Accruals, Prepayments and Bad Debts

Question 1

What are Prepayments?

Answer 1

• Amounts paid in advance to suppliers of service
• This is excluded in the Income Statement
• This is a Current Assets in the SOFP

Question 2

What are Accruals?

Answer 2

• Amounts owing to suppliers of service
• This is included in the Income Statement

Question 3

What is ‘Bad Debt’?

Answer 3

• Reviewing the likelihood that your Trade Receivables will repay you

Question 4

What is the difference between Bad Debt and Doubtful Debt?

Answer 4

• Bad Debt: Some will never repay you
• Doubtful Debt: Some may never repay you
• In this case, you can set “provisional” money aside to ensure the loss isn’t too bad

Question 5

What do Bad Debts look like on an Income Statement?

Answer 5

• Any Bad Debt or Provisions for Doubtful Debt are Expenses on the Income Statement
• Additions to Gross Profits can take the form of any decreases in Provisions for Doubtful Debts from Last Year

Question 6

What do Bad Debts look like on an SOFP?

Answer 6

In the Current Asset Section
- Remove the Bad Debt amount from the TR Total in the SOFP
- Show TR in SOFP Minus the whole Provision for Doubtful Debts