Chapter 14&15

Question 1

What is irrecoverable debts?

Answer 1

Irrecoverable debts arise when a trade receivable (credit customer) is unable (or unwilling) to pay the amount owed in respect of goods sold on credit.
- Irrecoverable debts are sometimes called ‘bad debts’.
- Treating a receivable as irrecoverable is a matter of judgement. A debt may be irrecoverable because:
* the credit customer cannot be traced;
* it is not worth taking the case to court; or
* the customer has been declared bankrupt (and the ‘final dividend’ in bankruptcy received).

Question 2

What is The ledger entries for
irrecoverable debts in terms of credit/ debit?

Answer 2

When it is decided that a customer balance is irrecoverable:
Debit - Irrecoverable debts a/c
Credit - Trade receivables account
At the end of the accounting period:
Debit - Statement of profit or loss a/c
Credit - Irrecoverable debts a/c

Question 3

What is an allowance?

Answer 3

-An allowance is the setting aside of income to meet a known or highly probable future liability or loss, the amount and/or timing of which cannot be ascertained exactly, and is thus an estimate.
- It is an application of the prudence concept (providing for losses) and the matching concept (it recognises the loss against the revenue that generates it).

Question 4

What are types of allowances for
irrecoverable debts

Answer 4

• An allowance for irrecoverable debts can consist of either or both of the following:
• A specific allowance in respect of particular trade receivable (credit customer) that has been identified as unlikely to pay their debts;
• A general allowance representing an estimate, usually computed as a percentage, of the trade receivables at the end of the accounting year who are unlikely to pay their debts.
  -A general allowance for irrecoverable debts involves the use of an estimation technique.

Question 5

What are the ledger entries for an
allowance for irrecoverable
debts in terms of credit / debits

Answer 5

1.To create or increase the allowance:
Debit - Irrecoverable debts a/c (P/L)
Credit- Allowance for Irrecoverable debts a/c (SOFP)
2. Decrease in the allowance:
Debit - Allowance for Irrecoverable debts a/c (SOFP)
Credit - Irrecoverable debts a/c (P/L)
3.The balance on the allowance for irrecoverable debts account is deducted from trade receivables in the statement
of financial position.

Question 6

What are the nature of accruals?

Answer 6

• The accruals concept dictates that costs are recognised as they are incurred, not when money is paid.
• That is, goods and services are deemed to have been purchased on the date they are received.
• This gives rise to accruals/accrued expenses which are creditors in respect of services received that have not been paid for at the end of the accounting year.
• Accrued expenses arise where services are paid for in arrears; e.g. electricity, gas, telephone calls.

Question 7

What is the composition of accruals?

Answer 7

• An accrual may comprise either or both of the following:
  1. Invoices received (for expenses) that have not been paid at the end of the accounting year;
  2. The value of services received for which an invoice has not been rendered at the end of the accounting year.
  The latter requires an estimate to be made of the amount of the services consumed during the period between the date of the last invoice and the end of the accounting year.

Question 8

What is the ledger entries for accruals?

Answer 8

Debit - Relevant expense account as a balance carried down (c/d) (current
period portion)
Credit - Relevant expense account
as a balance brought down (b/d) (next
period portion)
- The debit will thus be included in the charge to the statement of profit or loss account, and the credit shown as a current liability on the statement of financial position.
- The charge to the statement of profit or loss account therefore reflects the total value of the services received/consumed during the accounting year.

Question 9

What is the ledger entries for drawings(Part 1)?

Answer 9

• Debit : Drawings account
• Credit: Cash/bank account with cash/cheques withdrawn by the owner, and any payments made by the business relating to the owners private affairs
  (e.g. taxation, purchase of vehicle for the owners private use, private motor expenses).
• Credit: Purchases account with goods taken by the owner for his/her personal consumption at cost;
  OR
  Sales account where the goods are taken at
  some other value.

Question 10

What is the ledger entries for drawings(Part 2)?

Answer 10

• Credit: Relevant expense account with any expenses that are partly private such as where business asset(s) are used partly for private purposes.
• Credit: Credit customers account (trade receivable) with any debts paid into the owners private funds (or private assets or services received in line of payment).
• Debit: Capital account
• Credit: Drawings account
  With the balance on the drawings account after all the above adjustments.

Question 11

what are ledger entries for goods on sale or return

Answer 11

• Goods on sale or return should be included in inventory at cost.
  1. Where they have been mistakenly recorded as sales, the entry must be reversed as follows:
  Debit - Sales revenue account
  Credit - Credit customers account (receivable)
  2. With the selling price of the goods.
  Debit - Inventory account
  Credit - Trading account (Statement of P&L)
  3. With the cost price of the goods, thus increasing the value of closing inventory