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Financial Accounting > Irrecoverable Debts and Allowances > Flashcards

Irrecoverable Debts and Allowances Flashcards

1
Q

What is the benefit of credit terms?

A

allows businesses to keep trading without having to provide cash up front

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2
Q

What is the ideal situation for a business to receive/pay money?

A
  • have shortest credit terms with customers as possible
  • have longest credit terms with supplier as possible
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3
Q

Receivables ledger

A
  • individual customer accounts
  • transactions with each credit customer
  • invoices/credits raised
  • discounts
  • contra entries
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4
Q

Credit Control Department

A
  • chase up customers to settle invoices
  • monitor credit limits
  • if order take over credit limit it won’t be actioned before payment
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5
Q

Why might customers fail to pay?

A
  • dishonesty
  • gone bankrupt/liquidated
  • foreign exchange control restrictions
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6
Q

What are the potential costs of offering credit facilities?

A
  • interest costs of overdraft if customers don’t pay promptly
  • costs to try to obtain payment, salary of credit control department
  • court costs
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7
Q

Aged receivables Analysis

A
  • all receivables analysed by customer and age of receivable
  • 30/60/90 days outstanding
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8
Q

Irrecoverable Debts

A
  • irrecoverable/ bad debt
  • definitely not expected to be paid
  • main reason when customer go bankrupt/liquidate
  • written off as expense in SoPL
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9
Q

What are the double entries for ideal situation of sale on credit and then debt paid

A

Dr Trade receivables
Cr Sales

Dr Bank
Cr Trade receivables

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10
Q

Why are irrecoverable debts important to be accounted for?

A
  • 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
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11
Q

What is the double entry to write off an irrecoverable debt?

A

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

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12
Q

How does irrecoverable debts affect profit?

A
  • not affect gross profit, only net as classed as other expense
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13
Q

What is the double entry for when irrecoverable debt is unexpectedly received?

A

Dr Bank (SFP) cash has been received
Cr Irrecoverable Debts Expense (SPL) reversing expense charged

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14
Q

Why are allowances for Receivables made?

A
  • 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
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15
Q

When might doubtful debts occur?

A
  • invoices in dispute
  • customers in financial difficulty
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16
Q

How are trade receivables shown in SFP?

A
  • net of any receivables allowance
  • are two separate general ledger a/c but combined in statement
17
Q

When is the allowance against the trade receivables balance made?

A
  • AFTER writing off any irrecoverable debts
18
Q

What is the double entry for creating a new allowance for receivables?

A

Dr Irrecoverable Debts expense (SPL)
Cr Allowance for receivables (SFP with Receivables)

  • still in receivables figure
19
Q

What are the three steps for making adjustments to receivables allowance?

A
  • calculate new allowance
  • compare it with existing balance b/d on allowance a/c
  • calculate increase/decrease required
20
Q

What is the double entry if the receivables allowance has increased?

A

Dr Irrecoverable debts expense (SPL)
Cr Allowance for receivables (SFP)

for the change amount

21
Q

What is the double entry if the receivables allowance has decreased?

A

Dr allowance for receivables (SFP)
Cr Allowance for receivables (SPL)

for the change amount

22
Q

What is the double entry for when a doubtful debt becomes a bad debt?

A

Dr irrecoverable debts expense (SPL)
Cr receivables (SFP)

can be done at any point in the year

23
Q

When is the allowance for receivables adjusted?

A
  • at period end accounts, not during the year
24
Q

What two accounts are sometimes used instead of just irrecoverable debts account?

A
  • irrecoverable debts expense for bad debts
  • allowance for receivables expense

Financial Accounting (13 decks)

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