lec 7 - Bad det and bad debt provision

Question 1

what is bad / irrecoverable debt

Answer 1

wwhen trade recievable (credit customer) is unable to/unwilling ot pay amount owed in respect of goods sold on credit

Question 2

treating a debt bad is a matter of

Answer 2

judgement

Question 3

why may a debt be ierecviverable

Answer 3

credit customer cyant be traced

credit customer been declared as bankrupt

not worth taking to court

Question 4

what will hapen wehn company accepts bad debt

Answer 4

officially write it off

Question 5

when business sells to customer on credit takin a risj as

Answer 5

customer may not pay amount owed

Question 6

business may have to write off debt ass a

Answer 6

bad debt

Question 7

bad debt are classified as a what and what s the effect on profit

Answer 7

expense

reduce

Question 8

what are teh ledger entries for bad debt

Answer 8

trade recievable amount reduces by amount owed

amount treated as an expense so increases expense reduces profit

Question 9

bad debt what % is company not getting debt back

Answer 9

100%

Question 10

what is doubtful debt

Answer 10

money yo predict you’ll be unable to get so turn it into bad debt

Question 11

what is the % chance company thin wont get doubtful debt back

Answer 11

70-80%

Question 12

even though doubtful debt / provision for bad debt i sjust a prediction what will the copany dod

Answer 12

still record it

Question 13

why wil company still record the prediction for bad debt/write it off

Answer 13

IAS dont want company to voervalue the bad debt

if company wont get it back then what is the poitn

Question 14

what idea do peovision for doubtful debt reflec

Answer 14

idea trade receivables may not be worth its book value

Question 15

what do provision for doubtful debt consist of

Answer 15

specific provision

general provision

Question 16

what is specific provision

Answer 16

particular trade recievbles identified as unlikely to pay back their debts

Question 17

what is general provision

what does it represent

what is it usually copleted ass

it is not ….

may take into accoutn

Answer 17

represents an estimate

usually completed as a % of the trade recievables

at end of accounting year who are unlikely to apy their debts

-

not exclusive to any debtor
may take into account econ condiitons

Question 18

the level of general provision should reflect

Answer 18

oast experiences of loss of debts

Question 19

when it comes to provision for doubtful debt what do we actually care about

Answer 19

change in provision level

Question 20

increase in provision =

Answer 20

increase in expense

Question 21

where do we normally/generally charge expense related to bad/doubtful debt to

Answer 21

selling and distribution

Question 22

clarify why

The provision for doubtful debts or bad debts is different to doubtful debts or bad debts

Answer 22

Doubtful debts or bad debts is an expense and has already occurred. The provision is a future loss.

Question 23

when must a future loss be recorded

Answer 23

as soon as it becomes likely to occur

Question 24

the future loss is like

Answer 24

owing someone. Sort of.

Question 25

since the future loss is like owing someone it is a

Answer 25

a liability. But a special type of liability.

Question 26

how co we create or increase a provision

Answer 26

increase expense - charge to selling and distribution costs , increase provision for doubtful debts

Question 27

example fo creating and increasing a privision

Last year, the company predict a provision of £1000

But this year, the company think the provision is only £1200 (maybe because better economic conditions)

Answer 27

: Last year, the company predict a provision of £1000
Charge £1000 as expense

But this year, the company think the provision is only £1200 (maybe because better economic conditions)

Increase the expense by £200

Increase provision for doubtful debt by £200

Question 28

how do we record a decrease in provision

Answer 28

decrease expeense charged to sellign and distributio cost

decrease provision for doubtful debt

Question 29

example of recording a decrease in provision

For example: Last year, the company predict a provision of £1000

But this year, the company think the provision is only £900 (maybe because better economic conditions)

Answer 29

: Last year, the company predict a provision of £1000
Charge £1000 as expense
But this year, the company think the provision is only £900 (maybe because better economic conditions) Reduce the expense by £100
 Reduce provision for doubtful debt by £100

Question 30

to sum up how do we do provisions etc

Answer 30

recognise the first charge
charge to expense

calculate differnece between second bit of into

increase/decrease expenses

increase/decreasse provision for debt

Question 31

sometimes a different expense account is used instead of

Answer 31

selling and distribution cost

Question 32

The balance on the provision for doubtful debts account is deducted from ….. in where ….. to show …

Answer 32

trade recievables

BS

net trade recievables

Question 33

in question example how did we adjust provision for doubtful debt once we reduced bad debbt

Answer 33

calculated the percentage - to get new provision

then calculate the difference between that and old provision
to see whether there is an increase or decrease in provision
and to note change

ledger enteries

decrease/increase selling and distribution cost by hte difference

decrease/increase provision for doubtful debt by the amount - also get new provision this way

reduce