Accounting for Bad and Doubtful Debts

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Questions and Answers

What is the formula to calculate the break-even point in units?

Fixed Costs / (Sales Price Per Unit - Variable Costs Per Unit)

Define 'net profit'.

Revenue minus total expenses

What is the purpose of a trial balance?

To verify the equality of debit and credit balances.

What type of account is 'Unearned Revenue'?

<p>Liability</p> Signup and view all the answers

In the context of accounting, what does FIFO stand for?

<p>First-In, First-Out</p> Signup and view all the answers

Flashcards

Debtors

Customers who owe money to a business.

Bad Debts

An expense representing uncollectible accounts receivable.

Provision for Doubtful Debts

An estimate of uncollectible accounts receivable. Reduces the accounts receivable balance to net realizable value.

Journal entry for bad debt expense

Debit bad debt expense, credit the provision for doubtful debt.

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Reducing a provision

Decreasing the provision for doubtful debts requires crediting the profit and loss account.

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Study Notes

The initial balance includes: Debtors at Rs 80,000, Bad debts at Rs 2,000, and a Provision for doubtful debts at Rs 4,000.
An adjustment to maintain the provision for bad debts at Rs 1,000 is required.
The provision for doubtful debts needs to be reduced from Rs 4,000 to Rs 1,000, a decrease of Rs 3,000.
Because the provision for doubtful debts has decreased, the profit and loss account should be credited by Rs 3,000.

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Description

Learn how to adjust the provision for doubtful debts in accounting. This example shows how to reduce the provision and the resulting impact on the profit and loss account. Understand the adjustments needed for debtors and bad debt provisions.