Lecture 6

Question 1

for most businesses (other than retailers), most sales are…

Answer 1

on credit

Question 2

what is the risk associated with trade receivables?

Answer 2

risk of debtor not paying

Question 3

reasons for a debtor not paying their trade receivable?

Answer 3

bankruptcy, dishonesty, refusal

Question 4

what must a business do when they are no longer going to receive their trade receivable balance?

Answer 4

write off the receivable and class it as a bad debt expense

Question 5

how is a bad debt written off as a journal entry?

(direct write off)

Answer 5

debit bad debt expense
credit trade receivables

Question 6

what are doubtful debts?

Answer 6

debts that the company are unsure they will receive payment on

Question 7

what causes doubtful debts to arise?

Answer 7

the business is worried certain customers will pay

the business predicts (based off past experiences) that some trade receivables wont be paid

Question 8

because of doubtful debts, what account is made?

Answer 8

allowance for doubtful debts account

Question 9

how & when is an allowance for doubtful accounts journal entry accounted for?

Answer 9

debit bad debt expense (to increase it)

credit allowance for doubtful debts (to increase it)

at the beginning of a period, a business will predict what % of trade receivables they predict won’t be paid, they increase bad debt expense and allowance by this amount

Question 10

what is the journal entry for a bad debt that has been recovered?

Answer 10

debit trade receivables
credit bad debt expense

debit cash
credit trade receivables

Question 11

what type of account is allowance for doubtful debts?

Answer 11

contra account

has opposite balance to bad debt expense

Question 12

what is the purpose of the allowance for doubtful debts account?

Answer 12

to ensure compliance with GAAP by aligning with the matching principle

Question 13

what impact do bad debts and doubtful accounts have on the income statement?

Answer 13

• bad debts written off during the period
• increase/decrease in allowance for doubtful debts
• bad debts recovered that had previously been written off
• total charge in relation to bad and doubtful debts

Question 14

where does allowance for doubtful accounts show up on the income statement?

Answer 14

operating expense

Question 15

where does bad debt expense show up on the income statement?

Answer 15

as an operating expense as part of the selling, general and administrative expenses

Question 16

net accounts receivable = ?

Answer 16

the accounts receivable balance that is shown on the balance sheet to prevent accounts receivable being overstated

accounts receivable gross - allowance for doubtful accounts

Question 17

trade receivables = ?

Answer 17

money owed to the business by debtors

Question 18

what is a typical cash transaction journal entry?

Answer 18

debit cash
credit sales revenue

Question 19

what is the typical credit transaction journal entry?

Answer 19

debit trade receivables
credit sales revenue

debit cash
credit trade receivables

Question 20

why is allowance for doubtful accounts a thing?

Answer 20

to ensure companies align with the matching principle

Question 21

matching principle = ?

Answer 21

expenses must be recorded in the period in which they’re incurred

Question 22

what does a debit balance in the allowance for doubtful debts indicate?

Answer 22

all the allowance was used up

Question 22

what is the journal entry for when a bad debt occurs (credit customer doesn’t pay)?

Answer 22

debit allowance for doubtful debts (to decrease it, as it’s being used up)

credit trade receivables (to decrease it, as it’ll no longer be received)

Question 23

what does a credit balance in the allowance for doubtful debts indicate?

Answer 23

not all of the allowance was used up