ongwe Ltd maintains a provision for doubtful debts at 2% of trade receivables. The b
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Jongwe Ltd maintains a provision for doubtful debts at 2% of trade receivables.
The balances in the ledger accounts as at 30 April 2021 were as follows:
Provision for doubtful debts as at 1st May 2020 £786
Trade receivables as at 30th April 2021 £33,450
One of the debtors has been declared bankrupt. As the accountant for Pinto Ltd you have realised that the trade receivable amounting to £1,350 will not be recovered and concluded that this should be written off as an irrecoverable debt.
Required:
- Prepare the provision for doubtful debts account. Balance the account and bring the balance down to 1st May 2021.
- Explain how this transaction would affect the profit or loss of Pinto Ltd in the current accounting period.
Step by step
Solved in 3 steps
