Exam code:4AC1
Adjustments for provisions for irrecoverable debts
How do I record the provision for irrecoverable debts on the financial statements?
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Calculate the provision for irrecoverable debts at the end of the current year
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Calculate the difference between:
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The provision for irrecoverable debts at the start of the year
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This value will be on the trial balance
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And the provision for irrecoverable debts at the end of the year
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This is the value that you need to calculate
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The difference is the value that is stated on the income statement
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If the provision for irrecoverable debts increases, the increase is listed with the expenses
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Label it provision for irrecoverable debts
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If the provision for irrecoverable debts decreases, the decrease is listed with the other income
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Label it provision for irrecoverable debts
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Record the new balance for the provision for irrecoverable debts on the statement of financial position
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List it underneath trade receivables in the current assets section
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Subtract the provision from the value for trade receivables
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Which accounting concepts are used when recording the provision for irrecoverable debts?
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The following accounting concepts are used when recording the provision for irrecoverable debts:
|
Concept |
Reason |
|---|---|
|
Accruals |
The likely expense of future irrecoverable debts is matched to the accounting period where the sales were made |
|
Prudence |
The likely irrecoverable debts should be subtracted from the profit for the year and the trade receivables so that the profits and the assets are not overstated |
Worked Example
Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up a provision for irrecoverable debts which is to be maintained at 4% of trade receivables.
(a) Prepare an extract from the income statement for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.
(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the income statement for the year ended 31 December 2023.
Answer
Part (a)
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Calculate the provision for irrecoverable debts
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4% ✕ $24 000 = $960
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This is an increase from $0
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It will appear as an expense on the income statement
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|
Clara Income Statement (extract) for the year ended 31 December 2022 |
|
|
$ |
|
|
Expenses |
|
|
Provision for irrecoverable debts |
(960) |
|
Clara Statement of Financial Position (extract) at 31 December 2022 |
||
|
Current Assets |
$ |
$ |
|
Trade receivable |
24 000 |
|
|
Provision for irrecoverable debts |
(960) |
23 040 |
Part (b)
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Calculate the new provision for irrecoverable debts
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4% ✕ $22 000 = $880
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Calculate the difference from the previous provision for irrecoverable debts
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$960 – $880 = $80
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This is a decrease
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It will appear as other income on the income statement
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|
Clara Income Statement (extract) for the year ended 31 December 2023 |
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|
$ |
|
|
Other income |
|
|
Provision for irrecoverable debts |
80 |
Responses