Chapter 9 Flashcards
Very simply, what are receivables?
Receivables are current assets
What is an asset?
An asset is a right to future economic benefits arising from past transactions or events.
What is bad debt?
when receivables are irrecoverable or “bad debts”
e.g. when amounts invoiced to customers may turn out to be irrecoverable
—if a customer has gone into liquidation or if an individual has been declared bankrupt
How should management treat bad debt?
Management should carry out a review for “ irrecoverable and doubtful debts”
-after the initial trial balance has been drawn up.
If a receivable is considered to be irrecoverable it should be “written off” to the statement of profit or loss so that assets are not overstated
What is the double entry for the writing off of irrecoverable debt
Dr Bad and doubtful debt expense (statement of profit or loss)
Cr receivables control account
i.e. we do not reverse the original sale
The amount written off should also be removed from the individual memorandum ledger
If you receive cash from a customer that has previously been written up as irrecoverable debt - DOUBLE entry?
Dr Cash
Cr Bad and doubtful debt expense
What is debt called if its not definetly irrecoverable, but management have concerns over the recoverability of its receivables?
Doubtful debts
What is an example of doutbful debt?
e.g. where a customer is disputing an invoice
e.g. whena customer is in some financial difficulty.
How should doubtful debt be treated?
-We dont want to write of debt off
-but still need to take a reasonably cautious approach
Set up an allowance for receivables/doubtful debts.
Where do ‘allowances’ lie in financial statements?
In the statement of financial position accounts.
They reduce the value of assets
What is the double entry for ‘creating an allowance for doubtful debts’
Dr Bad and doubtful debt expense (statement of profit or loss)
Cr Allowance for receivables (statement of financial position)
The amount remains in the trade receivables ledger and in the individual memorandum ledger. This ensures that credit control staff still attempt to collect the amount due
What happens once an allowance has been made?
One of the following two:
1) The customer still refuses to pay and debt is considered irrecoverable
2) The customer pays
Double entry: Doubtful debt: the customer still refuses to pay - debt is irrecoverable
Dr Allowance for receivables
Cr Receivables control account
NB: already taken the expense of setting up the alloance so we do not take another expense
Instead we remove the receivable and remove the allowance from the ledgers
Double entry: doubtful debt but then the customer pays
Step 1 Record the recipt of cash from the customer
Dr Cash
Cr Receivables control amount
Step 2: remove the allowance from the ledgers and recognise the ‘bonus income’ we have received (as we have already recognised a doubtful debt expense
Dr Allowance for receivables
Cr Bad and doubtful debt expense
What is the difference between specific allowance and general allowance
Specific Allowance - certiain customers are identified as being bad or doubtful
General allowance - when an allowance is set against debts generally, recognising that a small percentage of all receivables will go bad
When is a general allowance provided?
A general allowance is provided on the debts remaining after:
1) writing off irrecoverable debts
AND
2) specific allowances have been made
How must the general allowance be calculated
Calculate the adjusted receivables figure after deductive write offs AND after deducting the specific allowance
The general allowance is calculated as a percentance of the adjusted receivables figure
Double entry for general alloance
Dr Bad and doubtful debt expense
Cr Allowance for receivables
Where does ‘allowance ‘ lie in the financial statements?
Statement of financial position account.
It is netter off against the trade receivables balance in the statement of financil position
What is the impact of an allowance increasing or decreasing
If the allowance increases, there will be an expense in the year or increase
If the allowance decreases there will be a reduction in the expense for the year
