Irrecoverable Debts & Allowance for Irrecoverable Debts (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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Define irrecoverable debt.
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Define irrecoverable debt.
An irrecoverable debt is an amount owed by a credit customer that the business is unable to collect.
It used to be called a bad debt.
Why are irrecoverable debts written off?
To follow the principle of prudence.
Leaving the debt in the accounts would overstate the assets, because the money is not going to arrive.
What is the double entry to write off an irrecoverable debt?
Credit the customer's account in the sales ledger, because the amount owed is falling.
Debit the irrecoverable debts account, because the write-off is an expense.
The book of prime entry is the journal.
True or False?
A debt should be written off as soon as a customer misses a payment.
False.
The business should first try everything it reasonably can to collect the money. A debt is written off once collection has become genuinely unlikely, such as when the customer is bankrupt or cannot be traced.
Julius owes $1200 and pays $500 before being declared bankrupt. How much is written off, and on which side of his account?
$700, entered on the credit side of his account in the sales ledger.
That entry closes the account, because $500 + $700 = $1200.
Complete the sentence about recovering a debt through the courts:
Taking legal action is usually a last resort, and it is not worth doing when the debt is smaller than the
.The completed sentence is:
Taking legal action is usually a last resort, and it is not worth doing when the debt is smaller than the legal fees.
How can a business reduce its irrecoverable debts?
By managing credit carefully:
setting a credit limit for each customer
running credit checks on new customers
communicating regularly about balances owed
taking legal action as a last resort
How can a debt that has already been written off come back?
The customer pays after all, either in full or in part.
This can follow renewed contact with the customer, an unexpected payment, or the use of a debt collection service.
What is the book of prime entry for the recovery of a debt written off?
The cash book.
A recovery begins with money actually being received, and that is what the cash book records.
How is a recovery recorded when the debt was written off in the same year?
The customer's account is used again: the debt is put back into the sales ledger, and the payment is then recorded in the normal way.
So the account is debited to restore the debt, and the debts recovered account is credited.
How is a recovery recorded when the debt was written off in an earlier financial year?
The sales ledger is not used at all.
Debit the cash or bank account with the money received, and credit the debts recovered account.
Complete the sentence about a debt recovered:
Recovering a debt that was written off
the profit for the year, because it is treated as an .The completed sentence is:
Recovering a debt that was written off increases the profit for the year, because it is treated as an income.
True or False?
A debt recovered can be set against the irrecoverable debts account instead of being shown separately.
True.
The balance on the debts recovered account can be transferred to the irrecoverable debts account, so that only the net expense reaches the statement of profit or loss.
$750 was written off and $300 of it was recovered in the same year. What single figure could go to the statement of profit or loss?
$450 as an expense, since $750 − $300 = $450.
The alternative is to show the $750 expense and the $300 income separately, and both presentations are acceptable.
Define allowance for irrecoverable debts.
An allowance for irrecoverable debts is an estimate of the amount of a period's sales that will turn out to be irrecoverable.
It is an estimate of future losses, not a debt that has actually gone bad.
Which two accounting principles does an allowance for irrecoverable debts follow?
Prudence, because neither the assets nor the profit are overstated.
Matching, because the estimated loss is charged as an expense in the same period as the sales that gave rise to it.
How is an allowance for irrecoverable debts first set up?
Debit the statement of profit or loss with the estimated amount and credit the allowance for irrecoverable debts account.
No entry is made in any customer's account in the sales ledger, because no particular debt has gone bad.
Why does an allowance for irrecoverable debts account have a credit balance?
Because it represents a reduction in an asset, namely the amount owed by trade receivables.
It is kept in a separate account, just as a provision for depreciation is kept apart from the asset account it relates to.
Complete the sentence about the statement of financial position:
The balance of the allowance for irrecoverable debts is
from the balance for .The completed sentence is:
The balance of the allowance for irrecoverable debts is subtracted from the balance for trade receivables.
The allowance for irrecoverable debts increases this year. How does that affect the statement of profit or loss?
Only the increase is charged, as an expense.
The whole allowance is not charged again, because the rest of it was already charged in earlier years.
The allowance for irrecoverable debts decreases this year. How does that affect the statement of profit or loss?
The decrease is treated as an income, so it increases the profit for the year.
Part of the expense charged in earlier years is being given back, because the estimate has turned out to be too cautious.
True or False?
When an allowance for irrecoverable debts is first created, the whole amount is charged as an expense.
True.
In the first year the allowance has risen from zero, so the increase and the whole allowance are the same figure.
An allowance of $1530 is to be changed to 3% of trade receivables of $48 500. What goes to the statement of profit or loss?
The new allowance is 3% × $48 500 = $1455, a decrease of $75.
That $75 is treated as an income, so it increases the profit for the year by $75.
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