Topic 6 Debtors

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Topic 6 Debtors

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

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