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Matt’s accounts at 30 November 20X8 show a closing Trade Receivable balance of $29000.
He wants to implement a general allowance of 2% of trade receivables at the year end but he has not yet dealt with the following items:
He has discovered Duncan went bankrupt on 29/11/X8. His balance of $650 is included at the year end.
Matt received $300 from Becks Limited, for a debt which he had written off on 26 May 20X7.
He wishes to specifically provide for 60% of the debt of $800 due from Cat.
What is the amount to be charged to the Income Statement in regard to Bad & Doubtful debts for the year ended 30 November 20X8?
I understand what needs to be done with part of the calculations but, I am trying to find logic on Cat’s debt that is specifically provided for i.e $480, I know the debit goes to Bad & Doubtful debts but am not sure which account to credit.
If his full debt of $800 was specifically provided for then we would debit Bad & doubtful debts with $800 and credit Allowance for Receivables by same amount.
Why is it that when working out the Allowance for Receivables the 2% is on 27550 (29000 less 650 less 800) and not on 27870 (29000 less 650 less 480)?
I just want to make sense of the “principle” if that’s what it’s about and I note part of this question is almost similar to the one on receivables asked 5days ago. I also watched the videos. However, such a case of debts specifically provided for in part, was not addressed.
Please help, Sir. Thank you.
If a specific provision is made against part of a debt, then it must mean that we have investigated and are happy that the rest of the debt is OK.
Therefore when calculating the general provision we subtract the whole of the debt (not just the amount specifically provided for).
Ok. So the other leg of 480 would still go to allowances for receivables account? Am confused there.
I don’t know what you mean by “other leg”.
The whole of the receivable would be unchanged (there is nothing irrecoverable).
When calculating the allowance required at the end of the year it would be the specific allowance of 480 plus a general allowance of 2% x 27550.
The only entry would be the entry needed to change any existing allowance to the amount required at the end of this year, and the double entry is to the irrecoverable and doubtful debts expense account.Thank you so much Mr Moffat. Now I get it. Am happy.
The other entry of double entry is what I meant by “other leg”.
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