U2, AOS 2 - Lesson 7 - Bad Debts

Question 1

A bad debt is…

Answer 1

…an expense incurred when a debt is written off because it is deemed to be irrecoverable.

Question 2

Irrecoverable means…

Answer 2

…the Account Receivable is never going to pay it back, they are in liquidation, administration or have been declared bankrupt.

Question 3

Recording bad debts upholds which QC?

Answer 3

Recording bad debts ensures faithful representation of the balances still owing and likely to be collected.

Question 4

Bad debt expense in the Income Statement ensures which QC?

Answer 4

Relevance by providing all information that is capable of making a difference to decision making about profit.

Question 5

What can a business do to reduce the potential of debts turning bad?

Answer 5

• Run credit checks on new customers
• Collect Accounts Receivables promptly to avoid accounts building up and becoming irrecoverable.
• Limit credit facilities of those accounts are not in good standing.

Question 6

T/f - An increase in bad debts expense will decrease net profit.

Answer 6

True