(a) Businesses often create an allowance for doubtful debts. (i) Of which concept (or convention) is this an example? Explain your answer.
(ii) What is the purpose of creating an allowance for doubtful debts?
(iii) How might the amount of an allowance for doubtful debts be calculated?
(b) On 1 January 2015 there was a balance of £500 in the an Allowance for Doubtful Debts Account, and it was decided to maintain the provision at 5% of the accounts receivable at each year end. The debtors on 31 December each year were:
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£
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2015
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12,000
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2016
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8,000
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2017
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8,000
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Show the necessary entries for the three years ended 31 December 2015 to 31 December 2017 inclusive in the following:
(i) the Allowance for Doubtful Debts Account;
(ii) the Statements of Profit or Loss.
(c) What is the difference between bad debts and allowance for doubtful debts?
(d) On 1 January 2017 Warren Mair owed Jason Dalgleish £130. On 25 August 2017 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.