Doubtful Debts - 5min Popquiz

1. The account that is created in the Balance Sheet to record the doubtful debts is called the "...................... for Doubtful Debts"

The correct answer is "provision." In accounting, a provision is an amount set aside to cover potential losses or expenses. In this case, the provision for doubtful debts is created to account for debts that may not be collected in the future. This provision is recorded on the balance sheet to ensure that the financial statements accurately reflect the potential impact of these doubtful debts on the company's financial position.

Explanation

The correct answer is "provision." In accounting, a provision is an amount set aside to cover potential losses or expenses. In this case, the provision for doubtful debts is created to account for debts that may not be collected in the future. This provision is recorded on the balance sheet to ensure that the financial statements accurately reflect the potential impact of these doubtful debts on the company's financial position.

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2. Doubtful debts are the actual losses that the business has incurred from the uncollected money of customer accounts.

True

False

Doubtful debts are not the actual losses that the business has incurred from uncollected customer accounts. Instead, they represent an estimate of potential losses that may arise from customers who may not be able to pay their debts in the future. These debts are recorded as an expense in the financial statements to reflect the possibility of non-payment.

Explanation

Doubtful debts are not the actual losses that the business has incurred from uncollected customer accounts. Instead, they represent an estimate of potential losses that may arise from customers who may not be able to pay their debts in the future. These debts are recorded as an expense in the financial statements to reflect the possibility of non-payment.

3. Doubtful debts are closely related to which accounting concept or principle?

Historical cost

Conservatism

Materiality

Going concern

Conservatism is closely related to doubtful debts in accounting. Conservatism is an accounting principle that suggests that when there is uncertainty or doubt regarding the collection of debts, it is important to recognize and account for potential losses. Doubtful debts refer to the accounts receivable that are likely to become uncollectible. Applying conservatism in this context means that a company should estimate and record these doubtful debts as expenses, even before they are officially declared as bad debts. This conservative approach ensures that the financial statements reflect a more realistic and cautious view of the company's financial position.

Explanation

Conservatism is closely related to doubtful debts in accounting. Conservatism is an accounting principle that suggests that when there is uncertainty or doubt regarding the collection of debts, it is important to recognize and account for potential losses. Doubtful debts refer to the accounts receivable that are likely to become uncollectible. Applying conservatism in this context means that a company should estimate and record these doubtful debts as expenses, even before they are officially declared as bad debts. This conservative approach ensures that the financial statements reflect a more realistic and cautious view of the company's financial position.

4. Which of the following statements is incorrect?

Doubtful debts form part of the end-of-period-adjustments

Accounting for doubtful debts reduces the profits for the accounting period

Doubtful debts are recorded as a negative asset account in the Balance Sheet

Under tax law, Doubtful debts are treated the same as Bad debts .

Doubtful debts are not treated the same as bad debts under tax law. While bad debts are fully deductible for tax purposes, doubtful debts may only be partially deductible or not deductible at all. This is because doubtful debts are those that are considered to have a higher level of uncertainty in terms of collection, whereas bad debts are those that are considered to have no chance of being collected. Therefore, the statement that under tax law, doubtful debts are treated the same as bad debts is incorrect.

Explanation

Doubtful debts are not treated the same as bad debts under tax law. While bad debts are fully deductible for tax purposes, doubtful debts may only be partially deductible or not deductible at all. This is because doubtful debts are those that are considered to have a higher level of uncertainty in terms of collection, whereas bad debts are those that are considered to have no chance of being collected. Therefore, the statement that under tax law, doubtful debts are treated the same as bad debts is incorrect.

5. Which of the following are generally acceptable ways of estimating doubtful debts for an accounting period?

As a % of total accounts receivable

As a % of total sales made on account

As a % of total creditors

As a fixed amount based on previous periods

The generally acceptable ways of estimating doubtful debts for an accounting period are as follows: estimating as a percentage of total accounts receivable, estimating as a percentage of total sales made on account, and estimating as a fixed amount based on previous periods. These methods are commonly used in accounting to estimate the amount of bad debts that may not be collected from customers. By considering the total accounts receivable or total sales made on account, and by using historical data from previous periods, businesses can make reasonable estimates of the doubtful debts for the current accounting period.

Explanation

The generally acceptable ways of estimating doubtful debts for an accounting period are as follows: estimating as a percentage of total accounts receivable, estimating as a percentage of total sales made on account, and estimating as a fixed amount based on previous periods. These methods are commonly used in accounting to estimate the amount of bad debts that may not be collected from customers. By considering the total accounts receivable or total sales made on account, and by using historical data from previous periods, businesses can make reasonable estimates of the doubtful debts for the current accounting period.

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