S1L8 Bad and Doubtful Debts/Credit Losses And Allowances For Credit Losses Flashcards
What are the two types of sales?
- On credit
- Immediate payment
What triggers the creation of receivables?
Receivables arise when a business makes a credit sale
What is the key accounting concept that emphasizes slow profit recognition?
Prudence
How does the prudence concept affect profit and loss recognition?
Slow to recognise profits and gains, but swift to anticipate losses
What should a business do if it believes a debtor will not pay?
They should be prudent and recognise this in the accounts
What are bad debts also known as?
CREDIT LOSSES
What characterizes a bad debt?
Definitely irrecoverable (e.g. debtor bankrupt)
What are doubtful debts also known as?
ALLOWANCES FOR CREDIT LOSSES
What is the risk associated with doubtful debts?
Some chance of recovery, but also a risk of non-payment
What happens if a customer never pays and goes bankrupt?
The sales figure is not altered; the loss is recognised as an expense in the IS
What is the impact of recognising doubtful debts on the financial statements?
A charge to the IS and a reduction to the value of receivables in the BS
How can adjustments for doubtful debts be made?
Against a specific debtor or as a general provision set as a percentage of total receivables
What is typically used as the expense account for doubtful debts?
The same expense account as for bad debts in the IS
What happens to the provision if it is not used or needed in subsequent years?
It is automatically carried over to the next year; appears in the TB as a credit entry
What is the importance of recognizing bad debt first?
To reduce receivables in order to calculate the correct provision figure
