lec 7 - Bad det and bad debt provision Flashcards
what is bad / irrecoverable debt
wwhen trade recievable (credit customer) is unable to/unwilling ot pay amount owed in respect of goods sold on credit
treating a debt bad is a matter of
judgement
why may a debt be ierecviverable
credit customer cyant be traced
credit customer been declared as bankrupt
not worth taking to court
what will hapen wehn company accepts bad debt
officially write it off
when business sells to customer on credit takin a risj as
customer may not pay amount owed
business may have to write off debt ass a
bad debt
bad debt are classified as a what and what s the effect on profit
expense
reduce
what are teh ledger entries for bad debt
trade recievable amount reduces by amount owed
amount treated as an expense so increases expense reduces profit
bad debt what % is company not getting debt back
100%
what is doubtful debt
money yo predict you’ll be unable to get so turn it into bad debt
what is the % chance company thin wont get doubtful debt back
70-80%
even though doubtful debt / provision for bad debt i sjust a prediction what will the copany dod
still record it
why wil company still record the prediction for bad debt/write it off
IAS dont want company to voervalue the bad debt
if company wont get it back then what is the poitn
what idea do peovision for doubtful debt reflec
idea trade receivables may not be worth its book value
what do provision for doubtful debt consist of
specific provision
general provision
what is specific provision
particular trade recievbles identified as unlikely to pay back their debts
what is general provision
what does it represent
what is it usually copleted ass
it is not ….
may take into accoutn
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
the level of general provision should reflect
oast experiences of loss of debts
when it comes to provision for doubtful debt what do we actually care about
change in provision level
increase in provision =
increase in expense
where do we normally/generally charge expense related to bad/doubtful debt to
selling and distribution
clarify why
The provision for doubtful debts or bad debts is different to doubtful debts or bad debts
Doubtful debts or bad debts is an expense and has already occurred. The provision is a future loss.
when must a future loss be recorded
as soon as it becomes likely to occur
the future loss is like
owing someone. Sort of.
since the future loss is like owing someone it is a
a liability. But a special type of liability.
how co we create or increase a provision
increase expense - charge to selling and distribution costs , increase provision for doubtful debts
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)
: 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
how do we record a decrease in provision
decrease expeense charged to sellign and distributio cost
decrease provision for doubtful debt
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)
: 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
to sum up how do we do provisions etc
recognise the first charge
charge to expense
calculate differnece between second bit of into
increase/decrease expenses
increase/decreasse provision for debt
sometimes a different expense account is used instead of
selling and distribution cost
The balance on the provision for doubtful debts account is deducted from ….. in where ….. to show …
trade recievables
BS
net trade recievables
in question example how did we adjust provision for doubtful debt once we reduced bad debbt
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
