Bad Debts & Provisions for Doubtful Debts

The rationale for making a provision in respect of doubtful debts is that the provision . . .

• is an estimate of future bad debts.

• records the expense of bad debts as they are incurred.

• matches the estimated cost of future bad debts against the revenue earned in giving rise to the potential bad debts.

• records bad debts without taking them out of the 'books' of an entity, thus showing the full amount owed by debtors as a current asset.

Relative to not having a provision for bad or doubtful debts, the existence of such a provision . . .

• increases the total of current liabilities.

• reduces the cost of sales.

• reduces the total of current assets.

• None of the above.

A credit balance on Mr. Murphy's account in a firm's debtors ledger means that . . .

• the amount owed by Murphy is a bad debt.

• one or more of Murphy's cheques has 'bounced'.

• the firm owes money to Murphy.

• a provision should be made specifically against Murphy's account.

When preparing financial statements, the bad debts account is 'closed' by a transfer to . . .

• the balance sheet.

• the profit and loss account.

• the trading account.

• the provision for bad debts account.

Provision for discount allowed on outstanding debtors balances should be calculated, at an appropriate rate, on . . .

• total debtors net of any bad debts written off.

• total debtors before account is taken of bad debts.

• total debtors less total creditors.

• total debtors net of any bad debts written off and after deducting the cumulative amount of any provision for doubtful debts.