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Hi John,
I’ve watched your irrecoverable debt lectures, I am uncertain of why we wouldn’t reduce the sales figure by the irrecoverable debt rather than show it as an expense. After all when accounting for a receivable we
Dr Rec
Cr Sales tax
Cr Sales (net)If the receivables are now being reduced by an amount we shall never receive why is it still within the sales line (appreciate we reduce it separately but as we have directly reduced the receivables I don’t understand why the same isn’t applied to the other original entries)?
Thank you
Although doing what you suggest would end up showing the same net profit, the reason we show the full sale and then record the irrecoverable debt separately is because it gives better information.
The gross profit lets us know the profit margin we are adding on when we sell goods. A debt becoming irrecoverable is a separate problem which we are showing separately.
(Also there are tax rules regarding as and when irrecoverable debts are allowed as a deduction when calculating the profit that is actually taxable, but they are not examinable in Paper FA. As regards the sales tax on the irrecoverable debt, again this is subject to the tax rules and so is not examinable in Paper FA.)
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