Bad debts and provision

Question 1

what are bad debts?

Answer 1

• expense to the business when accounts receivable is likely to fail to pay debts
• to ensure that financial statements are relevant, balance day adjustments are necessary to reflect the possibility of accounts receivable going bad

Question 2

what is the Provision for Doubtful debts account

Answer 2

Provision for Doubtful debts is an account to estimate present accounts receivable that are unlikely to pay their debts in the next accounting period

Question 3

how to Determine the amount of provision

Answer 3

• One common method is on the basis of past experience, a certain percentage of debts can be estimated to be doubtful.
• For example, 2% of accounts receivable balance might always be considered to be the amount of doubtful debts.

Question 4

what is a statement of financial position?

Answer 4

will show amount owing from account receivable, but also the reduced amount that will be collected if some accounts prove to be bad

Question 5

what is statement of profit and loss

Answer 5

the net profit is reduced by bringing to account an expense for these possible bad debts