Debtors 'balance is considered one of the most important asset accounts in commercial companies, and this...

Debtors 'balance is considered one of the most important asset accounts in commercial companies, and this balance is shown in the budget after deducting part of the balance in order to meet the possibility of not collecting any of the debtors' accounts, and that is through an estimate dedicated to doubtful debts, and the accountant may rely on several methods to calculate and estimate them, as well as It takes into account the bad debts, what is the best method in evaluating debtors, the direct write-off method or the provisions method? Why? Explain

Expert Solution

There are 2 ways to account for bad debt expense. The fundamental difference between the 2 methods is in timing difference of bad debts expense recognition and accounting principles applied for accounting bad debt expense. Hence both methods are not same and the recommended method for accounting is allowance method. A direct method of write off is not in accordance with conceptual framework for financial reporting as explained below.

Direct write-off method: This method accounts for bad debts based on actual bad debts generated in business that is when customer is unable to pay and it is confirmed that customer dues is a bad debt For example: A court order is passed for customer insolvency is a confirmation of bad debts expense. In this case the bad debts are debited to Income statement and credit is given to Accounts receivable. This method is not in accordance with accrual concept and matching concept since bad debts are not accrued for each period and bad debts of different period can be charged to sales of different period.

Allowance method: This method considers the percentage of allowance on Accounts receivable balance during the period and accounting is done through an Allowance for uncollectible receivables. The bad expense is calculated as percentage of closing Accounts receivable balance. A bad debts expense is debited and credit is given to allowance for uncollectible receivables. Only when the customer dues are confirmed as bad debts it is debited to Allowance for uncollectible receivables account and credit is given to accounts receivable account. This method is in accordance with accrual concept and matching concept since bad debts are accrued in the period in which sales take place and bad debts expense match the sales recognised in the period. The Accounts receivable is shown at Gross minus allowance for uncollectible account to show its net realisable value in Balance Sheet.

Allowance method of bad debts write off is preferred over direct method as per conceptual framework for Financial Reporting. The allowance method is recommended since it gives true and fair view of financial statements because it is in line with accrual concept and matching concept of financial reporting framework

ekkarill92 answered 1 year ago

NAME OF ACCOUNTS Dr. Balance £ Cr. Balance £ Opening stock 8,000 Buildings 15,000 Debtors 4,000...

NAME OF ACCOUNTS Dr. Balance £ Cr. Balance £ Opening stock 8,000 Buildings 15,000 Debtors 4,000 Purchases 22,000 Salaries 1,200 Sales 36,000 Discounts 800 Sales returns 1,000 Furniture 3,000 Office expense 300 Wages 600 Purchase returns 600 Interest 500 Travelling expenses 400 Insurance 600 Machinery 8,000 Carriage on purchases 800 Commission 600 Cash in hand 1,400 Rent and rates 2,400 Capital 25,000 Creditors 8,000 70,100 70,100 Following adjustments need to be made: a) Closing stock was valued at £ 9,000...

Q: Choose the correct answer Income is considered one of the most important items in financial...

Q: Choose the correct answer Income is considered one of the most important items in financial statements because: a-Investment Guide b-Scope for determining accounting policies c-The intellectual premise of honest representation d-Application for the basis of the interview 2- The name Of Luke Basiloli of Italy is linked to the following: a-Money b-The Art of Writing c- Record-keeping system d-Trade 3- The concepts of continuity, periodicity and entitlement appeared at the stage of: a-Asset processing phase b-Industrial Revolution c-Expand ing...

Intangibles can be one of the most important yet most undervalued assets on a company balance...

Intangibles can be one of the most important yet most undervalued assets on a company balance sheet (if recorded at all). Pick a company that has an intangible asset (recorded or not) - tell us what it is, how it's beneficial to the company and how it was developed or purchased.

1)The allowance for doubtful accounts is reported as a contra-asset on the balance sheet Select one:...

1)The allowance for doubtful accounts is reported as a contra-asset on the balance sheet Select one: True False 2)When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. Select one: True False 3)Tangible long-lived productive assets differ from intangible long-lived productive assets in that tangible assets have physical substance whereas intangible assets have no physical substance. Select one: True False 4)Treasury stock is a corporation's own stock that was issued and then repurchased,...

One of the most important financial models is the Capital Asset Pricing Model (CAMP). It basically...

One of the most important financial models is the Capital Asset Pricing Model (CAMP). It basically says that the expected return of an asset is related to several factors such as the risk-free rate, the beta of the asset and the expected rate of return on the market portfolio. For initial discussion post, choose a stock, and explain how you would come up with the expected rate of return for your stock based on the CAPM. When doing so, assume...

Discuss why embodied energy is considered one of the most important concepts related to materials? Do...

Discuss why embodied energy is considered one of the most important concepts related to materials? Do you agree that access to daylight and views can enhance efficiency of building occupants? You can support your argument with an example.

1: -Balance of account = Debits – -Asset accounts have a normal balance. -The...

1: -Balance of account = Debits – __________ -Asset accounts have a normal __________ balance. -The dividends account has a normal __________ balance. -Revenue accounts have a normal __________ balance. -Expense accounts have a normal __________ balance. -Liabilities and retained earnings accounts normally have a __________ balance. -The retained earnings account includes income statement accounts and the __________ account.

One of the most important, if not the most important aspect of portfolio analysis is that...

One of the most important, if not the most important aspect of portfolio analysis is that of “Performance Evaluation”, therefore it is very important that investments practitioners utilize the different methods of performance evaluation to understand the results which were generated. Do you agree or disagree, provide detailed information to support.

what is the most important asset a business can have?

The following three companies have asset financing structures which are considered to be aggressive, average and...

The following three companies have asset financing structures which are considered to be aggressive, average and defensive strategists: Statement of Financial Position as at 31st December, 2019 Aggressive Ltd Average Ltd Defensive Ltd GHȼ000 GHȼ 000 GHȼ 000 Noncurrent assets 175,000 125,000 100,000 Current assets 75,000 125,000 150,000 Total assets 250,000 250,000 250,000 Equity(100,000,000 @ Gh1) 50,000 50,000 50,000 25% Debenture 50,000 75,000 150,000 Current liabilities (average cost 3% pa) Bank overdraft 150,000 125,000 50,000 Total equity and liabilities 250,000...

Question