Business Accounts - Year-End Adjustments - Bad and Doubtful Debts Flashcards
(10 cards)
What is a bad debt?
A debts which a business knows with certainty it will never recover, often because the debtor has become insolvent
How is a bad debt recorded in the financial statements?
- Removed from the Receivables (asset) account in the balance sheet
- Added to the Bad and Doubtful Debts expense in the profit and loss account
What is the accounting term used in company accounts for bad debts expense?
Impairments
What is a doubtful debt?
A debt for which the business is uncertain whether payment will be received, and wishes to reflect that risk in the accounts
What are the 2 types of doubtful debts provisions?
- Specific provisions - concerns a known struggling debtor
- General provisions - based on market or sector trends suggesting a proportion of debts may be unpaid
What is a provision for doubtful debts?
An estimated liability-like figure representing the amount the business does not expect to collect from receivables. It is deducted from assets and shown in the balance sheet.
How much of the provision for doubtful debts is shown as an expense?
Only the increase in the provision compared to the previous year (or the full amount if it is a new business).
What happens if the provision for doubtful debts decreases?
The decrease is treated as a reduction in expenses, effectively increasing profit for the period.
How is the provision for doubtful debts shown in the balance sheet?
It is matched to the receivables asset and shown as a deduction (e.g. receivables £101,000 less provision £2,500 = net receivables £98,500).
What is the nature of a provision for doubtful debts using ALCIE classification?
It is treated like a liability because it reduces the value of the receivables asset.
