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Distinguish between bad debts and allowance for doubtful debts

      

Distinguish between bad debts and allowance for doubtful debts

  

Answers


Francis
Distinction between bad debts and provision for bad debts
Bad debts: These are debts arising out of credit sales that cannot be recovered because, for example, the customer is bankrupt. It’s a loss to the business and should be written off to the profit and loss account and debtors figure adjusted with the same amount.

Allowance for doubtful debts: these are debts arising out of credit sales that may not be recovered by the business. A company usually creates a provision for the likelihood that some debts may not be collectible.
- If it’s the first time (not allowance is shown the trial balance)
Dr. Profit and loss a/c
Cr. Provision for bad debts a/c
(Then deduct the figure from the debtors in the balance sheet)
- If it’s not the first time (there is a provision already in the trial balance) just check if there is an increase on a decrease in the provision). If it’s an increase, it’s a loss and if it’s a decrease, report under other incomes after gross profit.
francis1897 answered the question on October 3, 2022 at 13:40


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    Finished goods 42,000,000
    Work-in-progress 15,500,000
    4. Accrued rent and general administrative expenses as at 31 December 2010 amounted to sh. 1,200,000 and sh. 1,500,000 respectively.
    5. Prepaid insurance as ta 31 December 2010 amounted to sh. 360,000
    6. A provision for corporation tax amounting to sh. 25,340,000 is to be made.
    7. Depreciation is to be provided as follows
    Asset Rate per annum
    Machinery 12.5% on reducing balance basis
    Computers 15% on straight line basis
    Ignore depreciation on buildings
    8. The directors propose to pay a dividend of sh. 0.50 per share

    Required:
    (a) Manufacturing, trading and income statement for the year ended 31 December 2010.
    (b) Statement of financial position as at 31 December 2010

    Date posted: October 3, 2022.  Answers (1)