Prudence Flashcards
What is the concept of prudence?
To ensure that assets and income are not overstated and liabilities and expenses are not understated.
What is the recoverable amount?
The value that can be obtained from it by the business
The higher of
- the value in use
- net realisable value
What is the going concern?
The assumption that an entity is a going concern and will continue to operate
What are trade receivables?
Represents amounts owed by customers
What are bad debts?
Debts that are unlikely to be paid, e.g. business gone in administration
What is the bad debts ledger?
Dr bad debts expense
Cr trade recievables
What are provisions for doubtful debts
They are made to cover unforeseen bad debts
- usually a percentage top the trade receivables balance
How is the provision for doubtful debts presented in financial statements?
In statement of financial position
Worked out as
Trade receivables - provision for doubtful debts = net trade receivables
How do you account for bad and doubtful debts?
- Have all bad debts been written off?
- Apply the doubtful percentage to trade receivables balance
- Compare new and old provisions
Closing - opening - Recognise the change in provision in the statement of profit or loss
Increase in PDD = increase in expense
Decrease PDD = decrease in expense - Present the net trade receivables
What does inventory look at for prudence?
Net realisable value
How do you calculate the net realisable value?
Selling price - costs to compete - costs to sell
What is the NBV if inventory is obsolete?
0
What are the stages in NRV?
- Calculate the NRV
- Compare the NRV to tiger cost
Cost - NRV - In the NRV is less than cost, you have to reduce
