VCE Unit 4 Accounting: Bad and Doubtful Debts

Overview

• Focus on recording bad and doubtful debts, as per Chapter 14 of the McMillan textbook.
• Importance of understanding these concepts for faithful representation in accounting.

Key Concepts

Bad and Doubtful Debts

• Doubtful Debts: Prediction that some accounts receivable may not be collected; requires an allowance for doubtful debts.
• Bad Debts: Expenses created when it is confirmed that specific customers can't pay.

Allowance for Doubtful Debts

• Negative asset account recognizing that some accounts receivable may not be collected.
• It is a prediction based on a percentage of net credit sales.

Bad Debts

• Recorded when a specific customer is confirmed unable to pay.
• Recognized as an expense.

Process for Recording

Step 1: Establish an Allowance for Doubtful Debts

• Create a prediction for doubtful debts as a percentage of net credit sales (credit sales - sales returns).
• Record in the General Journal using a debit to Bad Debt Expense and a credit to Allowance for Doubtful Debts.

Step 2: Write-off Bad Debts

• Identify and write-off specific customers who can't pay.
• Reduce Accounts Receivable by the amount of the bad debt.
• Reverse part of the allowance for doubtful debts prediction by debiting it since the prediction has been realized.
• Adjust GST Clearing if applicable, as no GST will be paid.

Step 3: Adjust Allowance for Doubtful Debts for Next Period

• Re-evaluate the estimate of doubtful debts for the next period.
• Consider the difference between the previous prediction and actual bad debts.
• Adjust the new allowance accordingly and use the results to update the General Journal with debits and credits based on the new prediction.

Example Calculations

• Example 1: Calculate allowance using credit sales of $100,000, sales returns of $4,000, and 5% likelihood of bad debts.
• Example 2: Adjust predictions based on new sales figures and past overestimations.
• Partial Payment: Account for partial payments made by a bankrupt customer.

Important Notes

• Partial Payment: Often occurs in real-world scenarios and exams; involves recognizing any partial payments made by customers.
• Key Definitions: Understanding the distinction between allowance for doubtful debts and bad debts is crucial.

Conclusion

• Master these concepts by practicing numerous questions, as they are complex but vital for unit 4 accounting.