Accruals

Question 1

[Accruals & Prepayment]

Concept in accruals and prepayment.

Answer 1

• Matching concept
• Expenses and revenues for the period are matched irrespective of actual receipts and payments

Question 2

[Accruals & Prepayment]

Accrued expenses

Answer 2

(Liabilities)
Dr Expenses
Cr Other Payables

Question 3

[Accruals & Prepayment]

Prepaid expenses

Answer 3

(Assets)
Dr Other Receivables
Cr Expenses

Question 4

[Accruals & Prepayment]

Accrued income

Answer 4

(Asset)
Dr Other receivables
Cr Income

Question 5

[Accruals & Prepayment]

Prepaid income

Answer 5

(Liabilities)
Dr Income
Cr Other payables

Question 6

[Accruals & Prepayment]

Reasons that the debts become irrecoverable debt

Answer 6

• Not in the position to pay the debt due to bankruptcy
• Dissapearance of credit customers
• Dispute and refusal on paying the current owing in the invoice

Question 7

[Accruals & Prepayment]

Concept for irrcoverable debt

Answer 7

• Prudence concept
• Avoid overstating current asset and profit

Question 8

[Accruals & Prepayment]

Ways to recognise irrecoverable debt recovered (income).

Answer 8

• Straight forward
• Dr Cashbook, Cr Irrecoverable debt recovered (income)
• Dr IDR, Cr SOPL
• Complex
  1) Reinstate account
  Dr Trade Receivables, Cr IDR (Income)

2) Record receipt
Dr Cashbook, Cr TR

3) Dr IDR, Cr SOPL

Question 9

[Accruals & Prepayment]

Recommendations to prevent irrecoverable debt from occurring.

Answer 9

• Initiate or increase credit checks/ references to assess the customer’s credit rating before extending credit to new customers.
• Fixing a credit limit for each customer.
• Issues Statement of Accounts as a reminder to credit customers.
• Offer cash discounts to encourage existing customers to pay their accounts on time.
• Charge interest.

Question 10

[Accruals & Prepayment]

Definition of allowance for irrecoverable debts

Answer 10

It is a general estimate of the percentage of debts which are not expected to be repaid. (uncertainty)

Question 11

[Accruals & Prepayment]

Accounting concepts in allowance for irrecoverable debts

Answer 11

• Prudence concept
• If the business anticipates that all its debt will not be paid, the business needs to estimate the amount which will be lost due to irrecoverable debt.
• To ensure profit is not overstated and the trade receivables will be shown at a realistic level so that it is not overstated.
• Matching concept
• The possible loss o revenue should be provided for in the period in which revenue was earned, not in a later period when the debts become irrecoverable.
• Therefore, amount of credit sales in which the business is unlikely to be paid is regarded as expense of the year in which those sales are made.

Question 12

[Accruals & Prepayment]

Creation of allowance (Dr, Cr)

Answer 12

Dr SOPL
Cr Allowance for irrecoverable debt

Question 13

[Accruals & Prepayment]

Increase in allowance for irrecoverable debt

Answer 13

• Posted as expense
• Dr SOPL (difference) , Cr Allowance for irrecoverable debt

Question 14

[Accruals & Prepayment]

Decrease in allowance for irrecoverable debt

Answer 14

• Posted as income
• Dr Allowance for irrecoverable debt, Cr SOPL (difference)

Question 15

[Accruals & Prepayment]

Factors that should consider when creating an allowance for irrecoverable debt

Answer 15

• Past experience
• State of economy
• Monitoring specific individual receivables’ account
• Length of time