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Topic 6 Debtors
 

Topic 6 Debtors

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    Topic 6 Debtors Topic 6 Debtors Presentation Transcript

    • TOPIC 6:ACCOUNTING FOR ASSET- DEBTORS
    • 1. Current Asset: Debtors
      Definition
      A debtor is a person who has an obligation to pay debt to a business resulting from the activities of buying stocks
      • 2 types of debtors:
      i. Trade Debtors- debtors from sales of stock
      ii. Debtors – from sales of assets.
    • Receivables
      Accounts receivable are amounts owed by customers on account.
      Notes receivable are claims for which formal instruments of credit are issued evidencing the debt.
      Other receivables include non-trade receivables such as interest receivable, loans, advances and GST receivable.
    • 1. Current Asset: Debtors
      Credit Control:
      i. Credit approval - approve the credit only
      to the appropriate customer
      ii. Recording – record a complete credit
      amount in the individual debtors account,
      before posting to debtors control account
      and make a frequent checking.
      iii.Credit policy – the credit policy must be
      determined before hand in the credit
      policy to the debtors.
    • >60
      days
      60
      days
      30
      days
      Current
      Period
      Total
      Debt
      Credit
      Limit
      Debtors
      1,000
      1,000
      1,000
      3,000
      5,000
      Ali
      1,500
      2,500
      4,000
      6000
      Ahmed
      500
      1,000
      1,500
      3,000
      4000
      Abu
      1. Current Asset: Debtors
      How to measure the collection of debtors account?
      This can be done using the ageing report.
      Refer to the ageing schedule, most probably Abu cannot settle his debt.
    • Accounting for Bad Debt Expense
      Allowance method
      Direct write-off method.
    • Methods of Estimating Doubtful Debts when using the Allowance method
      Percentage of sales – Estimated for expense is based on some measure of sales
      Percentage of Receivables – Estimate for expense is based on ending accounts debtor and the existing balance in the allowance account.
    • Allowance for Doubtful Debt:
      What is the difference between the bad debt and allowance for doubtful debt?
      - Bad debt is a debt that cannot be collected within the accounting period.
      • Allowance for doubtful debt is an expected debt that cannot be
      collected within accounting period.
      Comply with the concept of:
      i. Matching
      ii. Prudence
      The journal entry to record bad debts expenses:
      Bad Debt Expenses
      Dr
      Allowance for Doubtful Debts
      Cr
    • Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses:
      Example 1: (No Allowance on doubtful debts account:)
      The information below is about Ainun Enterprise for the year ended 31/12/07.
      Debtor (before bad debt written off) RM 80,000
      Bad Debts written off RM 2,200
    • Cr
      Dr
      2,200
      Bad Debt Expenses
      2,200
      Debtors
      (being a bad debt written off)
      2200
      Income Statement
      2200
      Bad Debt Expenses
      (posting to Income Statement)
      Bad debts exp. 2,200
      Bal b/d 80,000
      Inc. Statement . 2,200
      Debtors 2,200
      Bal. c/d 77,800
      80,000
      80,000
      2,200
      2,200
      Journal Entry:
      Debtors’ a/cBad debts expenses
    • Operation Expenses :
      2,200
      Bad debts
      Current Asset
      77,800
      Debtors
      77,800
      ( 0)
      (-) Allow for d/d
      Presentationin Income Statement:
      Income Statement for the year ended …
      Presentation in Balance Sheet:
      Balance Sheet as at ….
    • Using the Allowance for BD & DD to write-off Bad Debts Expenses:
      Example 2: (No bad debts written off and Allowance for BD & doubtful debts is created):
      The information below is about Ainun Enterprise for the year ended 31/12/07.
      Debtor (before bad debt written off) RM 80,000
      Ainun expected that uncollectible debt is 3% from the debtors balance.
      Workings:
      Allowance for Bad Debt & Doubtful debt on 31/12/2007
      80,000 x 3% = RM 2,400
    • Journal Entry:
      Allowance for BD & DD a/c
      Bad debts expenses a/c
      Cr
      Dr
      2,400
      Bad Debt Expenses
      2,400
      Allowance for BD & DD
      (being an allowance for d/d for the year)
      Bad debts exp. 2,400
      Bal c/d 2,400
      IS 2,400
      All d/d 2,400
      2,400
      2,400
    • Operation Expenses :
      2,400
      Bad debts
      Current Asset
      80,000
      Debtors
      77,600
      ( 2,400)
      (-) Allow. for d/d
      Presentation in Income Statement:
      Income Statement
      Presentation in Balance Sheet:
      Balance Sheet as at….
    • Using the Allowance for BD & DD to write-off Bad Debts Expenses:
      Example 3: (Decrease in Allowance for BD & DD):
      The information below is about Ainun Enterprise for the year ended 31/12/07.
      Debtor (before bad debt written off) RM 80,000
      Bad debts written off RM 2,200
      Allowance For doubtful debt (1/1/07) RM 2,500
      Ainun expected that un-collectible debts is 2% from the debtors balance
      Workings:
      Provision for doubtful debt on 31/12/2007
      (80,000 – 2,200) x 2% = RM 1,556
    • Cr
      Dr
      2,200
      Allowance for BD & DD
      2,200
      Debtors
      (being a bad debt written off)
      1,256
      Bad debts expenses
      1,256
      Allowance for BD & DD
      (being a decrease in allowance for doubtful debt)
      Journal Entry:
    • Balance b/d 2,500
      Debtors 2,200
      Bad debts expenses 1,256
      Balance c/d 1,556
      3,756
      3,756
      Income Stat.
      All. For BD
      DD 1,256
      1,256
      All for BD &DD 2,200
      Bal b/d 80,000
      Bal. c/d 77,800
      80,000
      80,000
      Allowance for BD & DD a/c
      Bad debts expenses a/c
      Debtor a/c
    • Operation Expenses :
      1,256
      Bad debts
      Current Asset
      77,800
      Debtors
      76,244
      ( 1,556)
      (-) All for BD & DD
      Presentation in Income Statement:
      Income Statement
      Presentation in Balance Sheet:
      Balance sheet as at
    • Using the Allowance for Doubtful Debt to write-off Bad Debts Expenses:
      Example 4: (Increase in Allowance for BD & DD):
      The information below is about Ainun Enterprise for the year ended 31/12/07.
      Debtor (before bad debt written off) RM 80,000
      Bad debts written off RM 2,200
      Allowance for BD & DD (1/1/07) RM 2,000
      Ainun expected that uncollectible debts is 5% from the debtors balance
      Workings:
      Allowance for BD & DD on 31/12/2007
      (80,000 – 2,200) x 5% = RM 3,890
    • Cr
      Dr
      2,000
      Allowance for doubtful debt
      200
      Bad Debt Expenses
      2,200
      Debtors
      (being a bad debts written off)
      3,890
      Bad debts expenses
      3,890
      Allowance for doubtful debt
      (Being an increased in the Allowance for BD & DD a/c)
      Journal Entry:
    • Balance b/d 2,000
      Debtors 2,000
      Bad debts expenses 3,890
      Balance c/d 3,890
      5,890
      5,890
      Income Stat. 4,090
      Debtors 200
      All for BD & DD 3,890
      4,090
      4,090
      All for BD & DD 2,000
      Bal b/d 80,000
      Bad debts exp. 200
      Bal. c/d 77,800
      80,000
      80,000
      Allowance for BD & DD a/c
      Bad debts expenses a/c
      Debtors’ a/c
    • Operation Expenses :
      4,090
      Bad debts
      Current Asset
      77,800
      Debtors
      73,910
      ( 3,890)
      (-) All for BD & DD
      Presentation in Income Statement:
      Income Statement
      Presentation in Balance Sheet:
      Balance sheet as at
    • Using the Allowance for BD & Doubtful Debt to write-off Bad Debts Expenses:
      Example 5: (Bad debt over Provision):
      The information below is about Ainun Enterprise for the year ended 31/12/07.
      Debtor (before bad debt written off) RM 80,000
      Bad debts written off RM 800
      Allowance For BD & DD (1/1/07) RM 1,650
      Ainun expected that un-collectible debts is 1% from the debtors balance
      Workings:
      Allowance for BD & DD on 31/12/2007
      (80,000 – 800) x 1% = RM 792
    • Cr
      Dr
      800
      Allowance for BD & DD
      800
      Debtors
      (being a bad debts written off)
      58
      Allowance for BD & DD
      58
      Bad debts over provision
      (Being a bad debt over provision)
      Journal Entry:
    • Balance b/d 1,650
      Debtors 800
      Bad debt over prov. 58
      Balance c/d 792
      1,650
      1,650
      All for BD & DD 58
      Income Stat. 58
      All for BD & DD 800
      Bal b/d 80,000
      Bal. c/d 79,200
      80,000
      80,000
      Allowance for BD & DD a/c
      Bad debts over provision a/c
      Debtors’ a/c
    • Other Income:
      58
      Bad debts over provision
      Current Asset
      79,200
      Debtors
      78,408
      ( 792)
      (-) Allowance for BD & DD
      Presentation in Income Statement:
      Income Statement
      Presentation in Balance Sheet:
      Balance sheet as at….
    • Bad Debt Recovered
      debt that are considered bad are paid back by customer (debtors) for the full amount or half of the amount
      Example :
      On 15/6/2007, one of the customers names
      Ali had paid back his debt for an amount of RM2,000
      • Journal Entry:
      Cr
      Dr
      2,000
      Bank
      2,000
      Ali a/c
      (being a cash received for customers bad debt)
      2,000
      Ali a/c
      2,000
      Bad debt recoverable
      (being a bad debts recoverable)
      OR
      2,000
      Bank
      2,000
      Bad debts recoverable
      (Being a bad debt recoverable)