prudence and bad and doubtful debts

Question 1

what is prudence

Answer 1

exercise caution when making judgements under conditions of uncertainty. make sure that assets and income are not overstated and liabilities and expenses are not understated

Question 2

what happens if an asset suddenly loses value eg through damage

Answer 2

recognise an impairment, determine the recoverable amount of PPE then compare that to net book value
if recoverable amount is lower than net book value then we must recognise an impairment for the difference

Question 3

what are trade receivables

Answer 3

represents amounts owed by customers

Question 4

what can recoverable amount = to

Answer 4

amount of cash to be received from those customers

Question 5

what are bad debts

Answer 5

amounts unlikely to be paid eg if customer has gone into administration

Question 6

what happens if they wont be able to re pay amount

Answer 6

customers balance no longer meets the definition of an asset therefore we remove it from the trade receivables balance

Question 7

what is the procedure for doubtful debts

Answer 7

make a provision for doubtful debts to cover unforeseen bad debts. estimation based on prior experiences. usually apply a percentage to the trade receivables balance

Question 8

how are doubtful debts set out in the statement of financial position

Answer 8

trade receivables
(provision for doubtful debts)
net trade receivables

Question 9

formula for change in provision of doubtful debts

Answer 9

closing provision - opening provision

Question 10

what does an increase in provision result in

Answer 10

increase expense in statement of profit or loss
and vice versa for decrease