Bad and Doubtful debts Flashcards
Bad Debt
Some customers may never pay. They may go “bust”. In these circumstances: (3)
- Thwe sales figure is not altered
- The loss is recognised as an expense in the IS
- A new type of expense appears in the IS alongside electricity, wages, insurance etc
Prudence
What is prudence?
If a business believes a debtor will not pay what should they do?
What is bad debt?
What is doubtful debt?
Slow to recognise profits and gains, but swift to anticipate losses
If a business believes a debtor will not pay they should be prudent and recognise this in the accounts
Bad debt = debt that is definitely irrecoverable (eg debtor bankrupt
Doubtful debt = some chance of recovery, but also a chance of non-payment
Doubtful Debts
- The accountant is being ______ in recognising the risk of ___-_______ and makes a charge to the __and some _________ to the value of ___________ in the __
- The adjustment may be against a _______ ________, or may be in the form of a _______ _________ set a percentage of total receivables
What would the Journal Entry look like?
Normally the same expense account is used as for bad debts in the IS, but separate accounts could be used
- The accountant is being prudent in recognising the risk of non-payment and makes a charge to the IS and some reduction to the value of receivables in the BS
- The adjustment may be against a specific debtor, or may be in the form of a general provision set a percentage of total receivables
Journal Entry
Dr Bad Debt expense (IS) 100
Cr Provision for Doubtful Debts (BS) 100
Introduction to sales and receivables
- Sales are either __ ______ or for ____________ __________
- Receivables arise when a business makes a _______ sale
What are the two effects of a sale?
What are the two effects upon settlement?
- Sales are either on credit or for immediate payment
- Receivables arise when a business makes a credit sale
Sale:
Dr Receivables 300
Cr Sales 300
Upon settlement: (payment by debtor/receivable)
Dr Cash/Bank 300
Cr Receivable 300
Provision in subsequent years
- If the provision is not used/needed it is
____________ ______ _____to the next year. It
would appear in the __ as a ______entry. - In the next year Heidi decides to increase the
provision to £1,500: - The balance sheet ___________ figure will be
shown net of the £1,500
- If the provision is not used/needed it is
automatically carried over to the next year. It
would appear in the TB as a credit entry. - In the next year Heidi decides to increase the
provision to £1,500: - The balance sheet receivables figure will be
shown net of the £1,500
Example – journal entries
Extract from the Trial Balance as at 31 October 2023
Cr£
Prov. for doubtful debts 1,500
Dr£
Receivables 75,000
Electric 2,200
Insurance 3,000
The following adjustments are to be made:
- A receivable of £2,500 has to be written off, and the general provision is to be adjusted to 3% of receivables.
- The last electric bill paid was for £600 and covered the three months to 30th September 2023
- The last insurance bill paid in the year was for £1,800 and covered the 12 months to 31st March 2024.
Write out the journal entries for the above
Prepare IS and BS extracts
- Write off of Bad Debt
Dr
Cr
Being the write off of the bad debt - Calculation of general provision:
£75,000 - £2,500 = £72,500
£72,500 @ 3% = £2,175
£2,175 is the final provision needed. Already have £1,500 provision so increase by £675
Dr
Cr
Being the increase in the general provision
- Electric Accrual
Dr
Cr
Being the accrual for Oct 23 (£600 x 1/3) - Insurance Prepayment:
Paid 12m to 31 March 2024
Prepaid Nov, Dec, Jan, Feb, Mar
Prepayment = £1,800 x 5/12 = £750
Dr
Cr
Being the prepayment for Nov - March
Extract from the Income Statement
Expenses
Bad Debt Expense (2,500 + 675) 3,175
Electric (2,200 + 200) 2,400
Insurance (3,000 – 750) 2,250
2,500 + 675
Extract from the Balance Sheet
Current Assets
Receivables 72,500 (75,000
– 2,500)
Less provision (2,175)
70,325
Prepayments 750
Current Liabilities
Accruals 200
