Bad Debts & Provision For Doubtful Debts

Question 1

Explain what principles are applied to bad debts and provision for doubtful debts

Answer 1

Matching: ensures that the part of the credit sales which in not received due to possible bad debts is matched as a provision against the sales for that period

Prudence: profit is not overstated in the income statement and trade receivables must be shown at a realistic value in the statement of financial position. The PFDD is subtracted from trade receivables to ensure that their total balance is not overstated at the end of each financial period by accounting for the foreseeable losses.

Question 2

Distinguish between bad debts and PFDD

Answer 2

Bad debts: the actual amount that a business will not be able to collect from trade receivables when the account of a trade receivable is written off

PFDD: an estimate of the amount which a business will lose in a financial year due to possible bad debts

Question 3

Define bad debts recovered

Answer 3

Money received from trade receivables after their debts were written off

Question 4

Name ways in which a business may decide on the amount of its PFDD

Answer 4

Question 5

Name ways how a business can decrease the amount of bad debts

Answer 5