topic7 year end adjustments:irrecoverable debts and allowances for doubtful debts

Question 1

irrecoverable and doubtful debts

Answer 1

-with credit sales, major risk is non payment
-we make a year end adjustment for irrecoverable debts
-also need to consider impact of doubtful debts and history of write offs
-receivables are an asset and must be shown at their realistic value

Question 2

irrecoverable debts

Answer 2

-we believe a customer will not pay
-straightforward accounting treatment:
-the debt is written off to irrecoverable debts expense and receivables is reduced in SFP
-DR irrecoverable debt expense, CR receivables(and customer account)
-at year end the total on the irrecoverable debts expense is transferred to the P or L

Question 3

allowances for doubtful debts

Answer 3

-when a balance is considered doubtful but not irrecoverable, a specific allowances made for it
-in addition, companies traditionally add on a general allowance
-this is usually a certain % of the year end receivables figure
-could also base a general allowance on age of debt