1(a) Businesses often create a provision for doubtful debts.
(i
) Of which concept (or convention) is this an example? Explain your answer.
(ii
) What is the purpose of creating a provision for doubtful debts?
(iii
) How might the amount of a provision for doubtful debts be calculated?
(b) On 1 January 2008 there was a balance of £500 in the provision for doubtful debts account,
and it was decided to maintain the provision at 5% of the debtors at each year end.
The debtors on 31 December each year were:
£
2008 12,000
2009 8,000
2000 8,000
Show the necessary entries for the three years ended 31 December 2008 to 31 December 2010
inclusive in the following:
(i
) the provision for doubtful debts account;
(ii
) the profit and loss accounts.
(c) What is the difference between bad debts and provision for doubtful debts?
(d) On 1 January 2010 Warren Mair owed Jason Dalgleish £130. On 25 August 2010 Mair was
declared bankrupt. A payment of 30p in the £ was received in full settlement. The remaining
balance was written off as a bad debt. Write up the account of Warren Mair in Jason Dalgleish’s
ledger.
(Northern Examinations and Assessment Board: GCSE)