Bad Debts

Question 1

Explain the meaning of provision for doubtful debts

Answer 1

An estimate of the amount which a business will lose in a financial year because of bad debts

Question 2

Suggest a way in which the amount of provision for doubtful debts may be determined

Answer 2

• percentage of total amount owing by credit customer
• estimate which individual credit customer will not pay their accounts
• consider the length of time the debts have been outstanding
• estimate based on experience

Question 3

State how the principle of prudence is applied when maintaining a provision for doubtful debts

Answer 3

• the profit of the year is not overstated

- the trade receivables are not overstated

Question 4

Suggest 2 ways to reduce the amount of bad debts

Answer 4

• reduce credit sales
• obtain references from new credit customers
• fix credit limit for each customer
• issue invoices and monthly statements promptly

Question 5

Explain how the principle of prudence is applied by maintaining a provision for doubtful debts

Answer 5

• the profit for the year is not overstated

- the trade receivables are not over stated

Question 6

Explain how the principle of accruals is applied by maintaining a provision for doubtful debts

Answer 6

• the sales for which a business is unlikely to be paid
• are regarded as an expense of the year which those sales are made

(2)

Question 7

State the meaning of bad debts

Answer 7

The amount owing to a business which will not be paid by the credit customer

Question 8

State the meaning of bad debts recovered

Answer 8

When a credit customer pays some, or all, of the amount owed after the amount was previously written off