Irrecoverable Debts and Allowances Flashcards
What is the benefit of credit terms?
allows businesses to keep trading without having to provide cash up front
What is the ideal situation for a business to receive/pay money?
- have shortest credit terms with customers as possible
- have longest credit terms with supplier as possible
Receivables ledger
- individual customer accounts
- transactions with each credit customer
- invoices/credits raised
- discounts
- contra entries
Credit Control Department
- chase up customers to settle invoices
- monitor credit limits
- if order take over credit limit it won’t be actioned before payment
Why might customers fail to pay?
- dishonesty
- gone bankrupt/liquidated
- foreign exchange control restrictions
What are the potential costs of offering credit facilities?
- interest costs of overdraft if customers don’t pay promptly
- costs to try to obtain payment, salary of credit control department
- court costs
Aged receivables Analysis
- all receivables analysed by customer and age of receivable
- 30/60/90 days outstanding
Irrecoverable Debts
- irrecoverable/ bad debt
- definitely not expected to be paid
- main reason when customer go bankrupt/liquidate
- written off as expense in SoPL
What are the double entries for ideal situation of sale on credit and then debt paid
Dr Trade receivables
Cr Sales
Dr Bank
Cr Trade receivables
Why are irrecoverable debts important to be accounted for?
- when part of receivables they are an asset but
- definition of asset is no longer met as no economic benefits are expected to flow
- so must be removed from SoFP
What is the double entry to write off an irrecoverable debt?
Dr irrecoverable debt expense (SoPL) - make an other expense instead
Cr Trade receivables (SoFP)- remove as asset
not come to of sales as still happened and counts
How does irrecoverable debts affect profit?
- not affect gross profit, only net as classed as other expense
What is the double entry for when irrecoverable debt is unexpectedly received?
Dr Bank (SFP) cash has been received
Cr Irrecoverable Debts Expense (SPL) reversing expense charged
Why are allowances for Receivables made?
- prudent precaution to account for doubtful receivables balances
- don’t want to overstate receivables as they are an asset
- not certain that they are irrecoverable so not written off
When might doubtful debts occur?
- invoices in dispute
- customers in financial difficulty
How are trade receivables shown in SFP?
- net of any receivables allowance
- are two separate general ledger a/c but combined in statement
When is the allowance against the trade receivables balance made?
- AFTER writing off any irrecoverable debts
What is the double entry for creating a new allowance for receivables?
Dr Irrecoverable Debts expense (SPL)
Cr Allowance for receivables (SFP with Receivables)
- still in receivables figure
What are the three steps for making adjustments to receivables allowance?
- calculate new allowance
- compare it with existing balance b/d on allowance a/c
- calculate increase/decrease required
What is the double entry if the receivables allowance has increased?
Dr Irrecoverable debts expense (SPL)
Cr Allowance for receivables (SFP)
for the change amount
What is the double entry if the receivables allowance has decreased?
Dr allowance for receivables (SFP)
Cr Irrecoverable Debts Expense (SPL)
for the change amount
What is the double entry for when a doubtful debt becomes a bad debt?
Dr irrecoverable debts expense (SPL)
Cr receivables (SFP)
can be done at any point in the year
When is the allowance for receivables adjusted?
- at period end accounts, not during the year
What two accounts are sometimes used instead of just irrecoverable debts account?
- irrecoverable debts expense for bad debts
- allowance for receivables expense
