In estimating the value of debtors a business has to be prudent since logically

In estimating the value of debtors a business has to

This preview shows page 15 - 20 out of 24 pages.

In estimating the value of debtors, a business has to be prudent since logically not all debtors will pay their debts. By providing provision for doubtful debt, a business will not overstate the value of debtors. Ledger Entries To create or increase in a provision: Debit Profit & loss account Credit Provision for doubtful debts 15
Image of page 15
Decrease in provision: Debit Provision for doubtful debts Credit Profit & loss account The balance on the provision for doubtful debts account is deducted from trade debtors in the balance sheet. Example: Pak Su prepares accounts to 31 December each year. On 31 December 2000, he decides to establish a provision for doubtful debts equal to 5% of debtors and to maintain the provision at 10% of debtors in the future. His debtors and bad debts can be summarised as follows: Year-end Debtors at year end (before writing off bad debts) RM Bad debts to be written off RM 31/12/13 22,400 1,400 31/12/14 20,700 1,200 31/12/15 25,900 3,400 Required: a) Make the necessary ledger entries to record Pak Su's bad debts and provision for doubtful debts. b) Show relevant extract from the profit and loss for the year to 31 December 2000, 2001 and 2002 and the balance sheet as at that date. Answer Debtors Date Particular RM Date Particular RM Bad Debts Date Particular RM Date Particular RM 16
Image of page 16
Provision For Doubtful Debts Date Particular RM Date Particular RM Company’s Name Statement of Comprehensive Income for the year ended 31 December 2013 2014 2015 Other income Decrease in doubtful debt Expenses Increase in doubtful debt Bad debts Company’s Name Statement of Financial Position as at 31 December 2013 2014 2015 Current asset Debtors ( - ) Provision For Doubtful Debts TUTORIAL – TOPIC 3 17
Image of page 17
Question 1 B.Jones is in business as a builder’ merchant. The following credit transactions took place during April 20X1 1 Apr Bought goods on credit from Brick Ltd for RM275 2 Apr Sold goods on credit to Oak Ltd for RM410 4 Apr Bought goods costing RM315 from Stone Ltd on credit 7 Apr Sold goods on credit to Pine Ltd for RM870 11 Apr Bought goods costing RM270 from Slate Ltd on credit 15 Apr Sold goods on credit to Lime Ltd for RM630 17 Apr Bought goods on credit from Brick Ltd for RM275 19 Apr Received a credit note for RM120 from Brick Ltd 22 Apr Sent Oak Ltd a credit note for RM220 24 Apr Stone sent us a credit note for RM75 in respect of goods returned 27 Apr Sent Pine Ltd a credit note for RM360. You are required to make the necessary entries in the books of prime entry and post to the related ledger. Question 2 For each of the following accounts, indicate whether it possesses a debit or credit balance. Use Dr or Cr. Account Dr or Cr Sales Accounts receivable Supplies expense Accounts payable Supplies inventory Retained earnings Depreciation expense Dividends payable Ordinary share Notes payable Question 3 Indicate either debit or credit the account named in parentheses. 1. Borrowed money from a bank (Notes payable), RM10,000. __ 2. Bought merchandise on account (Merchandise inventory), RM4,000. ___ 3. Paid Arthur Associates RM3,000 owed them (Accounts Payable). ____ 4. Received cash from customers on accounts due (Accounts Receivable). ____ 5. Bought merchandise on account (Accounts Payable). ___ 6. Sold merchandise (Merchandise Inventory), RM1,5000. __ Question 4 18
Image of page 18
Use T or F to indicate whether each of the following statements is true or false.
Image of page 19
Image of page 20

You've reached the end of your free preview.

Want to read all 24 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture