Chapter 10 : Trade Receivables

Question 1

Explain the term trade receivables

Answer 1

Trade receivables refer to the amounts owed by customers who buy goods and services from businesses on credit.

Question 2

Explain why business grants credit to customers

Answer 2

A business grants credit to its customers to encourage customers to buy goods and services from it so that they will be able to receive the goods and services from the business first and pay later.

Question 3

Explain the term allowance for impairment on trade receivables

Answer 3

Allowance for impairment of trade receivables refer to the estimate amount of trade receivables that are likely to be uncollectible in the future.

Question 4

Using an appropriate accounting theory, explain why is it necessary for a business to provide for allowance for impairment of trade receivables.

Answer 4

According to the prudence theory, assets and profits should not be overstated while liabilities and losses should not be understated.
Hence, at the end each financial period, the business will review its trade receivables balance to estimate the amount that is likely to be uncollectible in the future and shown it as allowance for impairment of trade receivables to be deducted against the book value of trade receivables. This is to ensure that trade receivables balance is not overstated and reflects the net amount that is collectible

Question 5

Explain the term impairment loss on trade receivables

Answer 5

Impairment loss on trade receivables refer to the change in allowance for impairment of trade receivables

Question 6

Using an appropriate accounting theory, explain why it is necessary for a business for a business to account for impairment loss on trade receivables

Answer 6

According to the matching theory, expenses incurred must be matched against income earned in the same period to determine profit for that period. Hence, the business will record the change in allowance as impairment loss on trade receivables in the same financial period as credit sales was earned to determine profit for the period

Question 7

Explain ways the business could do to reduce the potential risk associated with selling to customers on credit

Answer 7

• Improve the credit granting processes by ensuring credit is granted to customers who are financially able
• offer cash discounts to encourage customers to pay promptly
• charge interest on overdue accounts

Question 8

State factors that a business can consider when assessing credit worthiness of credit customers

Answer 8

• Reputation of customer
• Customer”s history of repayment
• Economic outlook
• Specific industry outlook

Question 9

Give examples of evidence which a business might use when assesing whether a debt is unlikely to be collectible

Answer 9

• Debt is overdue
• Cheque is dishonoured
• Debtor is uncontactable
• Rumors that debtor is having financial difficulties