Accounting For End Of Period Adjustments: Irrecoverable Debts
Overview
A provision for irrecoverable debts is never calculated from nothing more than once. After the first year, a business already has a provision sitting on its books, and the year-end job is to decide whether that provision needs to grow, shrink, or stay the same, based on this year's closing trade receivables.
In this lesson you will learn how to adjust an existing provision for irrecoverable debts at the year end, how an increase or a decrease is recorded and affects profit, and how the figures for irrecoverable debts and trade receivables are presented in the income statement and the statement of financial position.
Objectives
- Explain why it is necessary to provide a provision for irrecoverable debts
- Distinguish between an irrecoverable debt and a provision for an irrecoverable debt
- Calculate and record irrecoverable debts and provision for irrecoverable debts in the books of account
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Lesson Evaluation
Congratulations on completing the lesson on Accounting For End Of Period Adjustments: 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.
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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.
- The required provision for irrecoverable debts rises from $500 to $700. What effect does this have on profit for the year? A) Increases profit by $200 B) Decreases profit by $200 C) No effect on profit D) Decreases profit by $700 Answer: B
- Trade receivables after write-offs are $20,000 and the provision policy is 5%. What is the required closing provision? A) $500 B) $1,000 C) $2,000 D) $4,000 Answer: B
- The provision for irrecoverable debts falls from $900 to $700. How is this recorded? A) Debit irrecoverable debts, credit the provision account B) Debit the provision account, credit irrecoverable debts C) Debit trade receivables, credit cash D) No entry is needed Answer: B
- What is deducted from trade receivables to find net trade receivables on the statement of financial position? A) The depreciation charge B) The closing provision for irrecoverable debts C) Capital D) Drawings Answer: B
- Opening provision for irrecoverable debts is $1,000. Required closing provision is $1,150. What amount is charged to the income statement? A) $1,000 B) $1,150 C) $150 D) $2,150 Answer: C
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