Module 5 - Bad And Doubtful Debts

Question 1

Bad debts definition

Answer 1

Debts that cannot (or are highly unlikely to be recovered)

Question 2

Doubtful debts definition

Answer 2

Debts that may not be recovered

Question 3

Both bad and doubtful debts lead to the recognition of what in the profit and loss account

Answer 3

Bad debt expense

Question 4

What must happen to bad debts in accounts?

Answer 4

Written off and removed from trade debtors

Question 5

Indicators of bad debt

Answer 5

A customer is insolvent

A customer has gone into liquidation

A customer has refused to help pay for goods / services due to a dispute

Question 6

When an entry recognises the write-off of a bad debt it will record the following journal entry

Answer 6

Dr Bad and Doubtful debts (expense) increase

 Cr  Trade debtors (asset) decreases 

This is because your expenses are going up in doubtful debts as you’ve not received what you wanted

And your trade debtors is going down because you assume you won’t get what you need

Question 7

When an entity recognises an allowance for doubtful debts, it will record the following journal entry:

Answer 7

Dr P&L - bad and doubtful debts (expense) increases

Cr Allowance for doubtful debts (acts like a liability) increases

Doubtful debts are not written off and removed from trade debtors. So an allowance for doubtful debts is created

Question 8

If an entity later receives cash from a debtor previously written off, it will record the following journal entry:

Answer 8

Dr Bank (asset) increases

 Cr  P&L - bad and doubtful debts (expense) decreases

Question 9

If an entity later receives cash from a debtor previously in allowance for doubtful debts, what happens?

Answer 9

The allowance will not be adjusted. Instead, the allowance will simply be recalculated at the period end