lec 7 - Bad det and bad debt provision Flashcards

1
Q

what is bad / irrecoverable debt

A

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

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2
Q

treating a debt bad is a matter of

A

judgement

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3
Q

why may a debt be ierecviverable

A

credit customer cyant be traced

credit customer been declared as bankrupt

not worth taking to court

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4
Q

what will hapen wehn company accepts bad debt

A

officially write it off

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5
Q

when business sells to customer on credit takin a risj as

A

customer may not pay amount owed

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6
Q

business may have to write off debt ass a

A

bad debt

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7
Q

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

A

expense

reduce

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8
Q

what are teh ledger entries for bad debt

A

trade recievable amount reduces by amount owed

amount treated as an expense so increases expense reduces profit

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9
Q

bad debt what % is company not getting debt back

A

100%

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10
Q

what is doubtful debt

A

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

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11
Q

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

A

70-80%

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12
Q

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

A

still record it

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13
Q

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

A

IAS dont want company to voervalue the bad debt

if company wont get it back then what is the poitn

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14
Q

what idea do peovision for doubtful debt reflec

A

idea trade receivables may not be worth its book value

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15
Q

what do provision for doubtful debt consist of

A

specific provision

general provision

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16
Q

what is specific provision

A

particular trade recievbles identified as unlikely to pay back their debts

17
Q

what is general provision

what does it represent

what is it usually copleted ass

it is not ….

may take into accoutn

A

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

18
Q

the level of general provision should reflect

A

oast experiences of loss of debts

19
Q

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

A

change in provision level

20
Q

increase in provision =

A

increase in expense

21
Q

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

A

selling and distribution

22
Q

clarify why

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

A

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

23
Q

when must a future loss be recorded

A

as soon as it becomes likely to occur

24
Q

the future loss is like

A

owing someone. Sort of.

25
since the future loss is like owing someone it is a
a liability. But a special type of liability.
26
how co we create or increase a provision
increase expense - charge to selling and distribution costs , increase provision for doubtful debts
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)
: 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
28
how do we record a decrease in provision
decrease expeense charged to sellign and distributio cost decrease provision for doubtful debt
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)
: 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
30
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
31
sometimes a different expense account is used instead of
selling and distribution cost
32
The balance on the provision for doubtful debts account is deducted from ..... in where ..... to show ...
trade recievables BS net trade recievables
33
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