Chapter 8 - irrecoverable and doubtful debts Flashcards
what is the double entry when making a sale
debit receivables - statement of financial position
credit sales - statement of profit or loss
what is the double entry when a customer pays the business
debit cash - statement of financial position
Credit receivables - statement of financial position
what is an irrecoverable debt
one that definitely wont be recovered. these are also known as bad debts
what is the double entry to remove the receivables as an asset once we know the customer will not be repaying
debit irrecoverable debt expense - statement of profit or loss
the expense will reduce our profit for the period as the customer not paying us has cost the business what they were owed.
credit receivables - statement of financial position
The credit entry not removes the debt from our receivables which reflects the fact the debt is no longer an asset as no cash is being collected
what is a doubtful debt
if a debt is possibly irrecoverable then it will be a doubtful debt. This may be because we are still trying to collect the debt although it is proving difficult.
In this case we don’t want to remove the receivable from our books we want to show we are still owed money from the customer but wouldn’t be fair to show the full value of the debt as an asset.
what is the double entry to make an allowance for a doubtful debt
debit allowance for doubtful debts adjustment - P/L
Credit allowance for doubtful debts - SFP
what are the two types of allowances
- a specific allowance
- A general allowance
what is a general allowance
one that is made against all debts, it is not allocated to any particular debt or customer.
e.g we know from past experience when we get to year end 5% of customers will not pay. we don’t know who these customers are but to be prudent we will make an additional adjustment to make an allowance for this
what is the double entry for a general allowance
Debit allowance for doubtful debt adjustment - P/L
Credit Allowance for doubtful debts SFP
what is the order in which to follow when making a general allowance
step 1 - write off any irrecoverable debts
step 2 - make any specific allowances
step 3 - calculate any general allowances
what is the double entry for when a debt which has been written off does end up being paid
Debit cash - SFP
Credit irrecoverable debts expense - P/L
This is because we have to account for the cash being received so must debit the cash account and the other side will be a negative expense so will be like additional income in the statement of profit or loss. This entry counteracts the expense which has been posted for the irrecoverable debt in a previous period
what happens if we discover that the debt we made a specific allowance against has now gone bad. What adjustment needs to be made
so far the entries we have made are debit receivables, credit sales. and when the specific allowance was made we debit allowance for doubtful debt adjustment and credit allowance for doubtful debts.
Now the debt has gone bad and needs remove the receivables from our books. In addition as we have removed the amount from receivables we no longer need an allowance against it.
The adjustment to make is debit allowance for doubtful debts -SFP credit receivables - SFP
what needs to happen when a specific allowance is recovered
When we have made a specific allowance but that customer pays we are receiving cash and the balance is no longer owed to us. We also have to remove the allowance
1- post the cash that has been recieved
Debit cash - SFP
Credit receivables - SFP
2- now the customer has paid we no longer need the allowance that we made previously therefore this needs reversing.
debit allowance for doubtful debts - SFP
credit allowance for doubtful debt adjustments - P/L
what happens when dealing with general allowances in subsequent periods
We adjust the general allowance at the end of each period
can a general allowance ever be recovered or go bad
no - as it is never allocated to any particular customer or any particular debt
