In: Accounting
The statement that is incorrect is (select one).
a. If a debtor fails to pay the receivable on it's due date this means that the debt is bad.
b. An outstanding debt may be turned over to a collection agency
c. Bad debts should be deducted as an expense in the same accounting period in which the credit sale was reconginised
d. Bad debits are a cost of selling on credits.
Statement 2 is true
When any debt is receivable the same can be forwarded to collecting agency for collection. Such collection is received and some commission is to be paid. Hence the statement is correct.
Statement 4 is correct.
Bad debits or bad debts are cost of selling on credits. When something is sold and not recovered the same is bad debt or bad debit. Such cost is cost of selling.
Now statement 1 and 3 are left.
There is a dispute here as both statements can be wrong.
Statement 1 says - debtors collection on due date is important. If the same is not collected then there is a default. Such default makes it bad. But a time period is allowed for rectifying the defaults before it is classified as bad debts.
Similarly, bad debts cannot be expensed out in same period as income is recognised since, some time period is to be given to complete the payment. Such payments can be beyond the financial year period. Hence it is not possible to expense the bad debt in same period as income.
Hence, both the statements can be wrong.
But, statement 3 is wrong on a larger scale, as expensing the bad debts in same year as income is not possible.
Statements 1 is still correct and due date payment if not made, makes is bad debt. Though the same may be recovered, but still classified ad bad debts due to its default.