Doubtful and Irrecoverable debts PDF

Preview

Summary

Doubtful and Irrecoverable debts...

Description

Financial Accounting: Irrecoverable Debts

Irrecoverable and doubtful debts 1: Selling goods on credit • When we sell goods on credit the double entry is o Dr o Cr

• When the customer pays us the double entry is o Dr o Cr

• However, this assumes that the customer will pay in full. In practice this may not be the case.

2: Irrecoverable debts • If a customer is unable to pay, then we create an IRRECOVERABLE debt as an expense in the income statement. • The double entry is o Dr o Cr

• The net effect is to reduce profits and assets.

1

Financial Accounting: Irrecoverable Debts • Example: At 31 December 20X1 Vicente has receivables totalling $156,000. He then reviews the sums due from customers and decides to write off the following as irrecoverable o Palace $11,000 o Zaha $17,000 o Freedman $ 5,000 Requirement: Show how the above irrecoverable debts should be dealt with in Vicente’s financial statements.

2

Financial Accounting: Irrecoverable Debts

3: Doubtful Debts Allowance • If we know from experience that some customers may not pay, then it may be sensible (and prudent) to set up a doubtful debt allowance. • This is usually calculated as a percentage of the amount due from customers. • This can be done on a simple or complex method, exam questions will always give you the basis of calculations. • An allowance for doubtful debts is deducted from the receivables total, and the MOVEMENT in the allowance is taken to the income statement. Example: Orlandi has receivables of £240,000 at 31 December 20X3. Included in receivables is an amount of £10,000 from Speroni that Orlandi is worried about. He therefore decided to create a 50% allowance in respect of the amount due from Speroni, and a 5% allowance for doubtful debts from other receivables. At 31 December 20X4 Orlandi’s receivables total £300,000. He decides to create a 30% allowance for a £20,000 debt due from Crystal, and a 4% allowance for other debts. Requirement: Show how the allowance for receivables should be treated in the financial statements for the year ended 31 December 20X3 and 20X4.

3

Financial Accounting: Irrecoverable Debts

4

Financial Accounting: Irrecoverable Debts

4: Supertutorial question Bruno has receivables of £246,000 at 31 December 20X1. Included in receivables is £16,000 due from Parrish, for which Bruno wants to create a doubtful debt allowance of 30%, and an allowance of 4% for the remaining receivables. At 31 December 20X2 receivables are £289,000. Included in this is a debt of £12,000 from Coppell which is not expected to be paid, and so should be written off. In addition there is an amount of £27,000 due from Jordan, which is overdue, and for which Bruno wishes to create a doubtful debt allowance of 60%, as well as an allowance of 5% for all other receivables. Requirement: Show how the above issues will be dealt with in the financial statements for the year ended 31 December 20X2.

5

Financial Accounting: Irrecoverable Debts

6

Financial Accounting: Irrecoverable Debts

5:Tutorial question Taricco has receivables of £198,000 at 31 December 20X1. Included in receivables is £8,000 due from Noades, for whichTaricco wants to create a doubtful debt allowance of 80%, and an allowance of 4% for the remaining receivables. At 31 December 20X2 receivables are £361,000. Included in this is a debt of £15,000 from Wright which is not expected to be paid, and so should be written off. In addition there is an amount of £26,000 due from Bright, which is overdue, and for which Taricco wishes to create a doubtful debt allowance of 50%, as well as an allowance of 6% for all other receivables. Requirement: Show how the above issues will be dealt with in the financial statements for the year ended 31 December 20X2.

7...