Bad Debts And The Provision For Doubtful Debts (Unit 1: Chapter 15)

Question 1

Explain the meaning of bad debts.

Answer 1

Bad debts is the actual amount that the business will not be able to collect from debtors.

Question 2

Explain the meaning of doubtful debts.

Answer 2

Estimated amounts that are not bad yet but will probably become bad.

Question 3

Explain the meaning of provision for doubtful debts.

Answer 3

An estimate of the amount that the business will lose due to possible bad debts
(Negative asset)

Question 4

Explain the meaning of Bad debts recovered.

Answer 4

Money received from debtors after their debts have been written off as bad.
(Income)

Question 5

Explain the need for credit control.

Answer 5

• Setting credit limits: Keeping control of the amount the debtor owes or buys on credit. This is linked to the income of the debtor and his ability to pay for goods on credit. The higher the income the more the debtor will be able to buy on credit.
• Credit History: Check whether debtors are previously black listed. Check whether the debtors are credit worthy.

Question 6

Name two objectives that a business wants to achieve when including provision for doubtful debts in the final accounts.

Answer 6

• To charge in the profit and loss account, for that year, an amount representing the sales of that year for which we will be paid.
• To show in the balance sheet as a correct figure as possible of true value of debtors at he balance sheet date.

Question 7

Name a few ways in which a business could reduce the risk of bad debts.

Answer 7

• Set a fixed credit limit.
• Follow up on overdue accounts.
• Refuse further supplies until customers pays outstanding amount.

Question 8

Explain to the bookkeeper why the business maintains a bad debts account, as well as a provision for doubtful debts account.

Answer 8

• Bad debts: Actual amount proved to be bad and written off.
• Application of prudence concept. Profits should not be overstated and assets should not be overvalued.
• Provision for doubtful debts: Only estimation, bad debts have not occurred yet.
• Application of matching principle, which states that profit is the difference between the revenue and expenses within the same financial period.