unit 8: bad debts + P4DD

Question 1

distinguish between bad debts, P4DD + bad debts recovered

Answer 1

bad debts- actual amount of money that a business will not be able to collect from credit customers which is written
P4DD- estimate of the amount which the business will lose due to possible bad debts
bad debts recovered- money received from credit customers after debts were written off; income to the business

Question 2

explain the need to record bad debts + provide for doubtful debts

Answer 2

• bad debts are recognised as an expense ;cause they aren’t expected to generate any economic benefits in the future, + therefore need to be written off
• P4DD is an estimate of the debts owed to us that will go bad in the future. we record this future loss as soon as we are aware that we will definitely lose money in the future.

Question 3

explain the application of the accrual/ matching + prudence principles to bad debts + P4DD

Answer 3

accrual/matching principle
- expenses of the yr are matched against the revenue for the same yr
- amount of sale/income/revenue for which the business is unlikely to be paid id regarded as an expense of the yr in which the sales are made

prudence principle
- ensures the profit for the yr aren’t overstated
- ensures tade recievables are shown at their realistic value