Bad/doubtful debts Flashcards
What is the 3 steps to record bad debts?
- Create the allowance
- Write down the allowance
- Top up the allowance
What will happen to the accounting elements when the bad debt is observed in the business?
Asset decreases due to increase in allowance for doubtful debts (negative current assets).
Liability is not affected.
Owner’s equity decreases due to increase in bad debt (expense).
What is meant by create the allowance?
In general journal, debits the bad debts and credits the allowance for doubtful debt.
The figure is calculated by Net Credit Sales × % for Credit Sales
How to calculate allowance for doubtful debt?
Net Credit Sales × % for Credit Sales
What is net credit sales?
Credit Sales - Sales Return
What is meant by write down the allowance?
In general journal, debit the allowance for doubtful debts and GST clearings, whilst credit the account receivable.
How to write down the allowance if the account receivable partially paid back their debt?
In general journal, debit the cash at bank, allowance for doubtful debts and GST clearings, whist credit the accounts receivable.
What is meant by top up the allowance?
In general ledger (allowance for doubtful debts), record the accounts receivable and balance at the end in the debit side.
Moreover record the balance at the beginning and bad debts on credit sides.
The figure is calculated by…
Account receivable = calculated when writing down the allowance
Balance at the end = net credit sales × % of credit sales (either the balance at the end is provided or new % of credit sales with new net credit sales is provided)
Balance at the beginning = calculated when created the allowance
Bad debt = Total of debit sides - Balance at beginning
Remember to record the value of bad debt (total of debit sides - balance at beginning) into the general journal. Debit the bad debts and credit the allowance for doubtful debts.
How to record bad debts in balance sheet?
Under current assets, records the account receivable then subtract that value by the allowance for doubtful debt (the balance at the end).
The impact on qualitative characteristic by recording bad debts.
It breaching the faithful representation as it is an estimate of future events.
However, it satisfies relevance (reports information that is useful of decision-making) as it recognises the likelihood of credit sales not being collected
qualitative characteristic of relevance – it reports information that is capable of making a
difference to the decisions made by users.
