Irrecoverable Debts And Allowance For Irrecoverable Debts
Overview
Selling on credit is how most businesses grow, but it comes with a risk: some customers will never pay. When all reasonable efforts to collect have failed, the amount owing becomes an irrecoverable debt, and accounting has a precise, prudent way of dealing with it. This topic shows you how to remove a hopeless debt from the books, what to do on the lucky occasion a written-off customer pays after all, and how a business sets aside an allowance for the debts it expects to lose in future.
You will learn to make the journal entries and ledger accounts that examiners ask for again and again, and to see exactly how each one flows through the income statement and the statement of financial position. By the end you will know the single most important rule of the allowance account: in every year after the first, only the change in the allowance touches profit, never the whole balance. Master that and a whole family of exam questions becomes routine.
Objectives
- the meaning of irrecoverable debts and irrecoverable debts recovered.
- how to prepare journal entries and ledger accounts to record irrecoverable debts.
- how to prepare journal entries and ledger accounts to record irrecoverable debts recovered.
- the need for maintaining an allowance for irrecoverable debts.
- how to prepare journal entries and ledger accounts to record the creation of, and adjustments to, an allowance for irrecoverable debts.
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Lesson Evaluation
Congratulations on completing the lesson on Irrecoverable Debts And Allowance For Irrecoverable Debts. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- A debt is described as irrecoverable. What does this mean? A. The customer has asked for more time to pay B. The amount owed will not be paid by the credit customer C. The customer has paid in cash instead of by cheque D. The amount owed has been paid early Answer: B
- A business writes off an irrecoverable debt of $300. What is the double entry? A. Debit customer $300, credit irrecoverable debts $300 B. Debit irrecoverable debts $300, credit customer $300 C. Debit cash $300, credit customer $300 D. Debit income statement $300, credit cash $300 Answer: B
- Trade receivables are $40 000 and an allowance for irrecoverable debts is to be maintained at 3%. What figure is deducted from trade receivables in the statement of financial position? A. $40 000 B. $3 000 C. $1 200 D. $38 800 Answer: C
- Last year the allowance for irrecoverable debts was $1 000. This year it must be $1 350. How is the change treated in this year's income statement? A. $1 350 added to gross profit B. $350 charged as an expense C. $1 350 charged as an expense D. $350 added to gross profit Answer: B
- How is the reduction in an allowance for irrecoverable debts shown in the income statement? A. As an expense B. As a deduction from gross profit C. As income added to gross profit D. It is not shown Answer: C
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