Week 16 - Trade Recievables, Trade Payables & Bad/Doubtful Debts

Question 1

Prudence Definition

Answer 1

The exercise of caution when making judgements under conditions of uncertainty

Question 2

What happens if it is evident a bad debt is irrecoverable?

Answer 2

The debt can no longer be treated as an asset (trade recievable), the debt has to be written off as an expense (bad debt expense)

Question 3

Provision for doubtful debts

Answer 3

If there is evidence that the debt may become irrecoverable, but still may be paid (e.g. debtor goes into administration but the 3rd party admins may pay off debts if enough liquidity is raised) the Trade Recievable should be maintained, but also book a doubtful debt expense

Question 4

2 types of provision of doubtful debts

Answer 4

Specific Provision - against a specific debtor

General provision - based on historical assumption that a certain % of debts aren’t paid I.e. 2%

Question 5

Double Entries for bad debts & provision for doubtful debts
Where they go in the statements

Answer 5

Bad Debts:
- Dr Bad Debt Expenses (Income Statement)
- Cr Trade Receivables (BS)

Provision for doubtful debts:
- Dr Doubtful debt expenses (IS)
- Cr Provision for doubtful debts (BS)