Question

Question 2

a) Discuss and describe two methods to account for bad debts. Provide an example of each method using journal. (7.5 Marks)

b) Identify and describe 5(five) internal control concepts and applications in control of cash receipts. (7.5 Marks)

c) Explain the difference between expenses paid in advance and accrued expenses. Provide an example of each to demonstrate your understanding.

Answer 1

All the answers to the above stated questions are provided along witht the explained examples where needed.

a) Discuss and describe two methods to account for bad debts. Provide an example of each method using journal.

Two methods to account for Bad Debts are:

1. The Direct Write-off Method - Under this method an allowance of bad-debts are not created, rather the bad-debts are written off from the accounts receivable account. This ,methos is usually adopted by small companies as it is simple and easy.
2. The Allowance Method - Under this method, an allowance is set up as per the past experience of particular company and the allowance is debited when the bad-debts are actually determined. This method is generally used by large comapnies.

Example Direct Write off method: Assume that ABC Co. writes off XYZ's $300 as Bad debts on December 12. The journal entry would be:

	Bad-debts A/c Dr.	300
	To accounts Receivable A/c		300
	(Being the accounts of XYZ written off as bad-debts)

Example of Allowance Method`: In this method bad-debts are calculated on the basis of earlier performances and the Allowance for bad-debts is set up. the Journal entry for this type of method would be ;

Bad-debts A/c Dr.
To Allowance for Bad-debts A/c
Allowance for Bad -debts A/c Dr.
To Accounts Receivables
(Entry to be made when the bad-debts are determined)

b) Identify and describe 5(five) internal control concepts and applications in control of cash receipts. (7.5 Marks)

Internal Control comprises of five interrelated celements. Though the elements apply to each type of entity but therer is difference in application of small and mid -size companies from large companies.The elements are:

1. Control Environment

It is the primary component of all other components of internal control whic includes discipline and structure. The factors included in the control environment are integrity, ethics, competence, philosopy adopted by management anf the method in which management assigns authority and the way they organize their human resource.

2. Risk Assessment -

There are several risks faced by any entity which can be internal or external, however, it is important to assess them. Risk Assessment is the process of determining and analysing the risks for achievement of any objective , that would define how to manage the risk.

3. Control Activities -

Control activities includes policies and procedures that would help management to ensure that directives are properly carried out. These activities ensures that proper actions are executed to achieve the organization's objectives.

4. Information and Communication

To ensure that people carry out their responsibilities effectively, important information should be determined, captured and communicated at required levels. Information system includes producing reports, that containsoperational, financial and compliance related information.

5. Monitoring

It is necessary to monitor the internal control system. Monitoring is a process that identifies and analysis the quality of system's performance. This can be achieved through continuous monitoring activities.

c) Explain the difference between expenses paid in advance and accrued expenses. Provide an example of each to demonstrate your understanding.

Prepaid Expenses

These are the expenses that are paid in advance. Though expenses are usually considered as an expense and recorded under liability but prepaid expenses are recorded as an asset in the balance sheet.

Example of prepaid expense is : Insurance Premium. Insurance premium is an expense, however recorded as asset because the insurance cover is going to be received in future. Other examples include advance rent paid, tax paid in advance by companies etc.

Accrued Expenses

Accrued expenses are the opposite of prepaid expenses. Prepaid expenses are recoded in current assets but accrued expenses are recorded in current liabilities. These are the expenses that are incurred but not yet paid.

Example of Accrued Expenses include Goods received but invoice has not delivered for payment.