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Question 1 Report
Hassan runs a grocery store. The following balances were extracted from his records.
At 1 May 2024
| Item | $ |
|---|---|
| Shop fittings (net book value) | 15 000 |
| Inventory | 7 800 |
| Trade receivables | 4 200 |
| Cash in hand | 600 |
| Bank (debit balance) | 3 400 |
| Trade payables | 5 600 |
At 30 April 2025
| Item | $ |
|---|---|
| Shop fittings (net book value) | 12 000 |
| Inventory | 9 200 |
| Trade receivables | 5 100 |
| Cash in hand | 800 |
| Bank (debit balance) | 4 600 |
| Trade payables | 6 200 |
During the year, Hassan:
(a) Calculate Hassan's capital at 1 May 2024. [3]
(b) Calculate Hassan's capital at 30 April 2025. [3]
(c) Calculate Hassan's total drawings for the year. [2]
(d) Calculate the profit or loss for the year ended 30 April 2025. [6]
(e) Explain how the goods taken for personal use should be recorded in the accounting records. [4]
(f) State one reason why shop fittings decreased in value. [2]
(a) Capital at 1 May 2024
Capital = Total assets - Total liabilities
Total assets = $15 000 + $7 800 + $4 200 + $600 + $3 400 = $31 000 [1]
Total liabilities = $5 600 [1]
Capital = $31 000 - $5 600 = $25 400 [1]
(b) Capital at 30 April 2025
Total assets = $12 000 + $9 200 + $5 100 + $800 + $4 600 = $31 700 [1]
Total liabilities = $6 200 [1]
Capital = $31 700 - $6 200 = $25 500 [1]
(c) Total drawings
Total drawings = Cash drawings $14 400 + Goods for personal use $2 000 = $16 400 [1][1]
(d) Profit or loss for the year
The profit can be found using the formula: Profit = Closing capital - Opening capital + Drawings - Additional capital introduced.
| Closing capital | $25 500 [1] |
| Less: Opening capital | ($25 400) [1] |
| Increase in capital | $100 |
| Add: Total drawings | $16 400 [1] |
| $16 500 | |
| Less: Additional capital introduced | ($8 000) [1] |
| Profit for the year | $8 500 [1] |
Correct method and workings shown. [1]
Drawings are added back because they reduced closing capital without being a business loss. Additional capital is deducted because it increased closing capital without being earned profit.
(e) Recording goods taken for personal use
The entry is: Debit Drawings $2 000 [1] and Credit Purchases $2 000 [1].
This reduces the purchases figure in the income statement (so cost of sales is not overstated) [1] and increases total drawings, which are deducted from the owner's capital in the statement of financial position [1].
(f) Why shop fittings decreased in value
Depreciation has been charged on the shop fittings ($15 000 - $12 000 = $3 000). [1] This reflects the wear and tear, usage, and ageing of the asset over the year. [1]
(a) Capital at 1 May 2024
Capital = Total assets - Total liabilities
Total assets = $15 000 + $7 800 + $4 200 + $600 + $3 400 = $31 000 [1]
Total liabilities = $5 600 [1]
Capital = $31 000 - $5 600 = $25 400 [1]
(b) Capital at 30 April 2025
Total assets = $12 000 + $9 200 + $5 100 + $800 + $4 600 = $31 700 [1]
Total liabilities = $6 200 [1]
Capital = $31 700 - $6 200 = $25 500 [1]
(c) Total drawings
Total drawings = Cash drawings $14 400 + Goods for personal use $2 000 = $16 400 [1][1]
(d) Profit or loss for the year
The profit can be found using the formula: Profit = Closing capital - Opening capital + Drawings - Additional capital introduced.
| Closing capital | $25 500 [1] |
| Less: Opening capital | ($25 400) [1] |
| Increase in capital | $100 |
| Add: Total drawings | $16 400 [1] |
| $16 500 | |
| Less: Additional capital introduced | ($8 000) [1] |
| Profit for the year | $8 500 [1] |
Correct method and workings shown. [1]
Drawings are added back because they reduced closing capital without being a business loss. Additional capital is deducted because it increased closing capital without being earned profit.
(e) Recording goods taken for personal use
The entry is: Debit Drawings $2 000 [1] and Credit Purchases $2 000 [1].
This reduces the purchases figure in the income statement (so cost of sales is not overstated) [1] and increases total drawings, which are deducted from the owner's capital in the statement of financial position [1].
(f) Why shop fittings decreased in value
Depreciation has been charged on the shop fittings ($15 000 - $12 000 = $3 000). [1] This reflects the wear and tear, usage, and ageing of the asset over the year. [1]
Question 2 Report
Rashid's bookkeeper made the following errors when recording transactions for the year ended 31 December 2024.
| Error | Details | Amount ($) |
|---|---|---|
| 1 | Legal fees for the purchase of new premises were charged as an expense | 5 000 |
| 2 | The purchase of new office equipment was added to the premises account | 8 000 |
| 3 | Revenue received from the sale of an old vehicle was recorded as sales revenue | 3 500 |
| 4 | Annual maintenance on the photocopier was recorded as a capital expense (added to equipment account) | 1 200 |
Draft profit for the year was $48 000.
(a) For each error, state the correct treatment and classify the item as capital expenditure, revenue expenditure, capital receipt, or revenue receipt. [8]
(b) For each error, state whether the correction will increase or decrease profit and by how much. [4]
(c) Calculate the corrected profit for the year. [4]
(d) Explain the difference between a capital receipt and a revenue receipt. [4]
(a) Correct treatment and classification of each error
| Error | Incorrect Treatment | Correct Treatment | Classification |
|---|---|---|---|
| 1 | Legal fees for new premises charged as an expense in the income statement | Legal fees should be added to the cost of the premises, since they are part of the cost of acquiring the non-current asset. [1] They are directly attributable to bringing the asset into use and must be capitalised. [1] | Capital expenditure |
| 2 | New office equipment added to the premises account | Office equipment should be recorded in a separate equipment account. [1] Although both are non-current assets, premises and equipment must be shown as separate asset categories in the statement of financial position. [1] | Capital expenditure (correct type, but wrong asset account) |
| 3 | Sale proceeds of old vehicle recorded as sales revenue | The proceeds from selling a non-current asset are a capital receipt. [1] They should be recorded in a disposal account, not as sales revenue in the income statement. [1] | Capital receipt |
| 4 | Annual photocopier maintenance added to the equipment account | Annual maintenance is a recurring expense that keeps the asset in working condition, not an improvement that extends its life. [1] It should be charged as an expense in the income statement. [1] | Revenue expenditure |
(b) Effect of each correction on profit
| Error | Effect on Profit | Amount ($) |
|---|---|---|
| 1 | Increase profit. The $5 000 was wrongly treated as an expense. Removing it from expenses and capitalising it increases profit. [1] | +5 000 |
| 2 | No effect on profit. This is a reclassification between two non-current asset accounts (premises to equipment). Neither account affects the income statement. [1] | 0 |
| 3 | Decrease profit. The $3 500 was incorrectly included as sales revenue. Removing it from revenue and transferring it to the disposal account reduces profit. [1] | -3 500 |
| 4 | Decrease profit. The $1 200 maintenance was wrongly capitalised. Charging it as an expense in the income statement reduces profit. [1] | -1 200 |
(c) Corrected profit calculation
| Draft profit | $48 000 | [1] |
| Add: Error 1 (legal fees reclassified as capital) | $5 000 | [1] |
| Less: Error 3 (vehicle sale removed from revenue) | ($3 500) | |
| Less: Error 4 (maintenance now charged as expense) | ($1 200) | [1] |
| Corrected profit | $48 300 | [1] |
Error 2 has no effect on profit, so it does not feature in this calculation.
(d) Difference between a capital receipt and a revenue receipt
A capital receipt is money received from the sale or disposal of a non-current asset (such as a vehicle, premises, or equipment) [1] or from the introduction of new capital by the owner. [1] It is a one-off inflow related to the long-term structure of the business, not its day-to-day trading.
A revenue receipt is income generated from the normal, recurring trading operations of the business, [1] such as sales revenue, rent received, commission earned, or interest received. [1] These are regular inflows that arise from the ordinary activities the business was set up to carry out.
(a) Correct treatment and classification of each error
| Error | Incorrect Treatment | Correct Treatment | Classification |
|---|---|---|---|
| 1 | Legal fees for new premises charged as an expense in the income statement | Legal fees should be added to the cost of the premises, since they are part of the cost of acquiring the non-current asset. [1] They are directly attributable to bringing the asset into use and must be capitalised. [1] | Capital expenditure |
| 2 | New office equipment added to the premises account | Office equipment should be recorded in a separate equipment account. [1] Although both are non-current assets, premises and equipment must be shown as separate asset categories in the statement of financial position. [1] | Capital expenditure (correct type, but wrong asset account) |
| 3 | Sale proceeds of old vehicle recorded as sales revenue | The proceeds from selling a non-current asset are a capital receipt. [1] They should be recorded in a disposal account, not as sales revenue in the income statement. [1] | Capital receipt |
| 4 | Annual photocopier maintenance added to the equipment account | Annual maintenance is a recurring expense that keeps the asset in working condition, not an improvement that extends its life. [1] It should be charged as an expense in the income statement. [1] | Revenue expenditure |
(b) Effect of each correction on profit
| Error | Effect on Profit | Amount ($) |
|---|---|---|
| 1 | Increase profit. The $5 000 was wrongly treated as an expense. Removing it from expenses and capitalising it increases profit. [1] | +5 000 |
| 2 | No effect on profit. This is a reclassification between two non-current asset accounts (premises to equipment). Neither account affects the income statement. [1] | 0 |
| 3 | Decrease profit. The $3 500 was incorrectly included as sales revenue. Removing it from revenue and transferring it to the disposal account reduces profit. [1] | -3 500 |
| 4 | Decrease profit. The $1 200 maintenance was wrongly capitalised. Charging it as an expense in the income statement reduces profit. [1] | -1 200 |
(c) Corrected profit calculation
| Draft profit | $48 000 | [1] |
| Add: Error 1 (legal fees reclassified as capital) | $5 000 | [1] |
| Less: Error 3 (vehicle sale removed from revenue) | ($3 500) | |
| Less: Error 4 (maintenance now charged as expense) | ($1 200) | [1] |
| Corrected profit | $48 300 | [1] |
Error 2 has no effect on profit, so it does not feature in this calculation.
(d) Difference between a capital receipt and a revenue receipt
A capital receipt is money received from the sale or disposal of a non-current asset (such as a vehicle, premises, or equipment) [1] or from the introduction of new capital by the owner. [1] It is a one-off inflow related to the long-term structure of the business, not its day-to-day trading.
A revenue receipt is income generated from the normal, recurring trading operations of the business, [1] such as sales revenue, rent received, commission earned, or interest received. [1] These are regular inflows that arise from the ordinary activities the business was set up to carry out.
Question 3 Report
A business had the following inventory transactions during April 2025.
| Date | Transaction | Units | Cost per unit $ |
|---|---|---|---|
| 1 Apr | Opening inventory | 80 | 10.00 |
| 8 Apr | Purchased | 120 | 11.00 |
| 15 Apr | Sold | 150 | |
| 25 Apr | Purchased | 100 | 12.00 |
At 30 April 2025, the market has declined. The net realisable value of each unit in inventory is $10.50.
(a) Calculate the closing inventory using the FIFO method. [4]
(b) Calculate the closing inventory using the AVCO method. [4]
(c) State which valuation should be used in the financial statements if net realisable value is $10.50 per unit. Give a reason. [3]
(d) Calculate the value of closing inventory to be shown in the financial statements. [3]
(e) Name the accounting concept that requires inventory to be valued at cost or net realisable value, whichever is lower. [1]
(f) Explain what is meant by net realisable value. [2]
(g) Explain the effect on the income statement if inventory is overvalued. [3]
(a) Closing inventory using the FIFO method
After the purchase on 8 April, there are 200 units in stock: 80 @ $10.00 and 120 @ $11.00.
Sale on 15 April (150 units) under FIFO: issue the oldest first.
Issue: 80 @ $10.00 + 70 @ $11.00 [1]
Remaining after sale: 50 @ $11.00 [1]
Purchase on 25 April: 100 @ $12.00
Closing inventory (FIFO) = (50 x $11.00) + (100 x $12.00) [1]
= $550 + $1 200 = $1 750 [1]
(b) Closing inventory using the AVCO method
After the purchase on 8 April:
Total units: 80 + 120 = 200
Total cost: (80 x $10.00) + (120 x $11.00) = $800 + $1 320 = $2 120
Weighted average cost per unit = $2 120 / 200 = $10.60 [1]
Sale on 15 April (150 units): issued at $10.60 each = $1 590 [1]
Remaining: 50 units @ $10.60 = $530
Purchase on 25 April: 100 @ $12.00 = $1 200
New total: 150 units, $530 + $1 200 = $1 730
New weighted average = $1 730 / 150 = $11.53 per unit (rounded to 2 d.p.) [1]
Closing inventory (AVCO) = 150 x $11.53 = $1 730 [1]
(c) Which valuation should be used
Inventory should be valued at the lower of cost and net realisable value (NRV). [1]
NRV per unit = $10.50, so total NRV = 150 x $10.50 = $1 575 [1]
Since NRV ($1 575) is lower than both FIFO cost ($1 750) and AVCO cost ($1 730), the NRV figure should be used. [1]
(d) Value of closing inventory in the financial statements
Closing inventory = 150 units x $10.50 = $1 575 [1][1]
This applies the lower of cost and NRV rule. [1]
(e) Accounting concept
Prudence (also known as conservatism). [1]
This concept requires that losses are anticipated and provided for, while gains are not recognised until they are realised. Using the lower of cost and NRV ensures that inventory is not overstated on the balance sheet.
(f) Net realisable value
Net realisable value is the estimated selling price of the inventory in the ordinary course of business. [1] It is calculated after deducting any further costs expected to be incurred in completing the goods and making the sale (such as finishing costs, packaging, or selling expenses). [1]
(g) Effect on the income statement if inventory is overvalued
If closing inventory is overvalued, the cost of sales will be understated (since closing inventory is deducted from cost of sales). [1]
As a result, gross profit will be overstated. [1]
Consequently, the profit for the year will also be overstated, and the financial statements will not show a true and fair view of the business performance. [1]
(a) Closing inventory using the FIFO method
After the purchase on 8 April, there are 200 units in stock: 80 @ $10.00 and 120 @ $11.00.
Sale on 15 April (150 units) under FIFO: issue the oldest first.
Issue: 80 @ $10.00 + 70 @ $11.00 [1]
Remaining after sale: 50 @ $11.00 [1]
Purchase on 25 April: 100 @ $12.00
Closing inventory (FIFO) = (50 x $11.00) + (100 x $12.00) [1]
= $550 + $1 200 = $1 750 [1]
(b) Closing inventory using the AVCO method
After the purchase on 8 April:
Total units: 80 + 120 = 200
Total cost: (80 x $10.00) + (120 x $11.00) = $800 + $1 320 = $2 120
Weighted average cost per unit = $2 120 / 200 = $10.60 [1]
Sale on 15 April (150 units): issued at $10.60 each = $1 590 [1]
Remaining: 50 units @ $10.60 = $530
Purchase on 25 April: 100 @ $12.00 = $1 200
New total: 150 units, $530 + $1 200 = $1 730
New weighted average = $1 730 / 150 = $11.53 per unit (rounded to 2 d.p.) [1]
Closing inventory (AVCO) = 150 x $11.53 = $1 730 [1]
(c) Which valuation should be used
Inventory should be valued at the lower of cost and net realisable value (NRV). [1]
NRV per unit = $10.50, so total NRV = 150 x $10.50 = $1 575 [1]
Since NRV ($1 575) is lower than both FIFO cost ($1 750) and AVCO cost ($1 730), the NRV figure should be used. [1]
(d) Value of closing inventory in the financial statements
Closing inventory = 150 units x $10.50 = $1 575 [1][1]
This applies the lower of cost and NRV rule. [1]
(e) Accounting concept
Prudence (also known as conservatism). [1]
This concept requires that losses are anticipated and provided for, while gains are not recognised until they are realised. Using the lower of cost and NRV ensures that inventory is not overstated on the balance sheet.
(f) Net realisable value
Net realisable value is the estimated selling price of the inventory in the ordinary course of business. [1] It is calculated after deducting any further costs expected to be incurred in completing the goods and making the sale (such as finishing costs, packaging, or selling expenses). [1]
(g) Effect on the income statement if inventory is overvalued
If closing inventory is overvalued, the cost of sales will be understated (since closing inventory is deducted from cost of sales). [1]
As a result, gross profit will be overstated. [1]
Consequently, the profit for the year will also be overstated, and the financial statements will not show a true and fair view of the business performance. [1]
Question 4 Report
During July 2025, the following goods were returned by credit customers of Obi Trading.
| Date | Credit Note No | Customer | Amount ($) | Reason |
|---|---|---|---|---|
| July 4 | CN 51 | K Sharma | 280 | Goods damaged |
| July 9 | CN 52 | M Tan | 150 | Wrong items sent |
| July 15 | CN 53 | R Patel | 420 | Overcharged |
| July 22 | CN 54 | K Sharma | 180 | Faulty goods |
| July 28 | CN 55 | S Wong | 260 | Goods not as ordered |
(a) Prepare the sales returns day book for July 2025. [6]
(b) Prepare the sales returns account in the general ledger. [2]
(c) Post the entries to the individual accounts in the sales ledger. [5]
(d) State two effects on the financial statements of recording sales returns. [4]
(e) Explain why a credit note is issued when goods are returned by a customer. [3]
(a) Sales Returns Day Book - July 2025
The sales returns day book records goods returned by credit customers. Each entry is supported by a credit note issued by the business.
| Date | Credit Note No | Customer | Amount ($) |
|---|---|---|---|
| Jul 4 | CN 51 | K Sharma | 280 [1] |
| Jul 9 | CN 52 | M Tan | 150 [1] |
| Jul 15 | CN 53 | R Patel | 420 [1] |
| Jul 22 | CN 54 | K Sharma | 180 [1] |
| Jul 28 | CN 55 | S Wong | 260 [1] |
| Total | 1 290 [1] | ||
(b) General Ledger - Sales Returns Account
| Date | Details | Debit ($) |
|---|---|---|
| Jul 31 | Sales Returns Day Book | 1 290 [1] |
The total is posted to the debit side of the sales returns account in the general ledger. [1] Sales returns is a debit entry because it reduces revenue.
(c) Sales Ledger - Individual customer accounts
Each return is posted to the credit side of the customer's account in the sales ledger, reducing what they owe.
| Account | Date | Details | Credit ($) |
|---|---|---|---|
| K Sharma | Jul 4 | Sales returns | 280 [1] |
| Jul 22 | Sales returns | 180 [1] | |
| M Tan | Jul 9 | Sales returns | 150 [1] |
| R Patel | Jul 15 | Sales returns | 420 [1] |
| S Wong | Jul 28 | Sales returns | 260 [1] |
(d) Two effects on the financial statements
(e) Why a credit note is issued
A credit note is a document sent to the customer acknowledging that goods have been returned and authorising a reduction in the amount they owe. [1] It reduces the customer's balance in the sales ledger. [1] The credit note serves as the source document for recording the transaction in the sales returns day book. [1]
(a) Sales Returns Day Book - July 2025
The sales returns day book records goods returned by credit customers. Each entry is supported by a credit note issued by the business.
| Date | Credit Note No | Customer | Amount ($) |
|---|---|---|---|
| Jul 4 | CN 51 | K Sharma | 280 [1] |
| Jul 9 | CN 52 | M Tan | 150 [1] |
| Jul 15 | CN 53 | R Patel | 420 [1] |
| Jul 22 | CN 54 | K Sharma | 180 [1] |
| Jul 28 | CN 55 | S Wong | 260 [1] |
| Total | 1 290 [1] | ||
(b) General Ledger - Sales Returns Account
| Date | Details | Debit ($) |
|---|---|---|
| Jul 31 | Sales Returns Day Book | 1 290 [1] |
The total is posted to the debit side of the sales returns account in the general ledger. [1] Sales returns is a debit entry because it reduces revenue.
(c) Sales Ledger - Individual customer accounts
Each return is posted to the credit side of the customer's account in the sales ledger, reducing what they owe.
| Account | Date | Details | Credit ($) |
|---|---|---|---|
| K Sharma | Jul 4 | Sales returns | 280 [1] |
| Jul 22 | Sales returns | 180 [1] | |
| M Tan | Jul 9 | Sales returns | 150 [1] |
| R Patel | Jul 15 | Sales returns | 420 [1] |
| S Wong | Jul 28 | Sales returns | 260 [1] |
(d) Two effects on the financial statements
(e) Why a credit note is issued
A credit note is a document sent to the customer acknowledging that goods have been returned and authorising a reduction in the amount they owe. [1] It reduces the customer's balance in the sales ledger. [1] The credit note serves as the source document for recording the transaction in the sales returns day book. [1]
Question 5 Report
Kato runs a business that sells goods on credit. The following information is available at 31 December 2024.
| Item | $ |
|---|---|
| Trade receivables at 31 December 2024 (before writing off) | 48 000 |
| Irrecoverable debts to be written off | 3 000 |
| Allowance for irrecoverable debts at 1 January 2024 | 2 400 |
Kato maintains an allowance for irrecoverable debts at 5% of trade receivables (after writing off irrecoverable debts).
(a) Calculate the trade receivables after writing off irrecoverable debts. [2]
(b) Calculate the new allowance for irrecoverable debts at 31 December 2024. [2]
(c) Calculate the change in the allowance for irrecoverable debts. State whether this is an increase or decrease. [2]
(d) Show the entries in the income statement relating to irrecoverable debts for the year ended 31 December 2024. [4]
(e) Show how trade receivables will appear in the statement of financial position at 31 December 2024. [4]
(f) Explain the purpose of maintaining an allowance for irrecoverable debts. [4]
(g) State the accounting concept that supports the creation of an allowance for irrecoverable debts. [2]
(a) Trade receivables after writing off irrecoverable debts
Trade receivables after write-off = $48 000 - $3 000 = $45 000 [1][1]
The irrecoverable debts are removed from the receivables balance because these amounts will not be collected.
(b) New allowance for irrecoverable debts
New allowance = 5% x $45 000 = $2 250 [1][1]
The allowance is calculated on the trade receivables balance after the irrecoverable debts have been written off.
(c) Change in the allowance
Change = Old allowance - New allowance = $2 400 - $2 250 = $150 decrease [1][1]
The allowance has decreased because trade receivables (after write-off) are lower than the previous year, and 5% of a lower figure produces a smaller allowance.
(d) Income statement entries
| Income statement extract (expenses section) | |
|---|---|
| Irrecoverable debts written off | $3 000 [1] |
| Less: Decrease in allowance for irrecoverable debts | ($150) [1] |
| Net charge for irrecoverable debts | $2 850 [1] |
The irrecoverable debts written off are an expense. The decrease in the allowance partially offsets this because it releases some of the previous year's provision back as income. Correct presentation. [1]
(e) Trade receivables in the statement of financial position
| Statement of Financial Position (current assets extract) | |
|---|---|
| Trade receivables | $45 000 [1] |
| Less: Allowance for irrecoverable debts | ($2 250) [1] |
| Net trade receivables | $42 750 [1] |
Shown under current assets. [1] The net figure represents the amount the business realistically expects to collect.
(f) Purpose of maintaining an allowance
The allowance recognises that not all trade receivables may ultimately be collected - some customers may default on payment. [1]
It provides for estimated future irrecoverable debts based on past experience and current conditions. [1]
This gives a more realistic and prudent valuation of trade receivables on the statement of financial position. [1]
It ensures the financial statements present a true and fair view of the business's financial position. [1]
(g) Accounting concept
The prudence (conservatism) concept. [1] This concept requires that losses should be anticipated and provided for as soon as they are foreseen, while profits should not be recognised until they are realised. Creating an allowance for potential future losses on receivables applies this principle. [1]
(a) Trade receivables after writing off irrecoverable debts
Trade receivables after write-off = $48 000 - $3 000 = $45 000 [1][1]
The irrecoverable debts are removed from the receivables balance because these amounts will not be collected.
(b) New allowance for irrecoverable debts
New allowance = 5% x $45 000 = $2 250 [1][1]
The allowance is calculated on the trade receivables balance after the irrecoverable debts have been written off.
(c) Change in the allowance
Change = Old allowance - New allowance = $2 400 - $2 250 = $150 decrease [1][1]
The allowance has decreased because trade receivables (after write-off) are lower than the previous year, and 5% of a lower figure produces a smaller allowance.
(d) Income statement entries
| Income statement extract (expenses section) | |
|---|---|
| Irrecoverable debts written off | $3 000 [1] |
| Less: Decrease in allowance for irrecoverable debts | ($150) [1] |
| Net charge for irrecoverable debts | $2 850 [1] |
The irrecoverable debts written off are an expense. The decrease in the allowance partially offsets this because it releases some of the previous year's provision back as income. Correct presentation. [1]
(e) Trade receivables in the statement of financial position
| Statement of Financial Position (current assets extract) | |
|---|---|
| Trade receivables | $45 000 [1] |
| Less: Allowance for irrecoverable debts | ($2 250) [1] |
| Net trade receivables | $42 750 [1] |
Shown under current assets. [1] The net figure represents the amount the business realistically expects to collect.
(f) Purpose of maintaining an allowance
The allowance recognises that not all trade receivables may ultimately be collected - some customers may default on payment. [1]
It provides for estimated future irrecoverable debts based on past experience and current conditions. [1]
This gives a more realistic and prudent valuation of trade receivables on the statement of financial position. [1]
It ensures the financial statements present a true and fair view of the business's financial position. [1]
(g) Accounting concept
The prudence (conservatism) concept. [1] This concept requires that losses should be anticipated and provided for as soon as they are foreseen, while profits should not be recognised until they are realised. Creating an allowance for potential future losses on receivables applies this principle. [1]
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