Lecture 7: Accounting for Trade Receivables

This set of vocabulary flashcards covers the fundamental concepts, accounting treatments, and financial statement presentations for trade receivables, bad debts, and allowances for doubtful debts based on the lecture notes.

Trade Receivable

A customer who owes the firm money because of credit sales; it is considered a current asset because recovery of the debt is expected within 12 months.

Bad debts

A debt that is confirmed to be uncollectible for a long time, such as when a customer declared bankruptcy, and is recorded as a normal business expense.

Accounting treatment for writing off bad debts

The business expense (bad debt) increases and the asset account (trade receivable) decreases by the amount written off.

Bad debts recovered

A business income recorded when a debt that was written off in previous years is eventually received from the customer.

Accounting treatment for bad debts recovered

Business income increases (bad debt recovered) and asset increases ($cash/bank$) by the amount recovered from previous years.

Allowance for doubtful debts (AFDD)

An account showing the expected total amount of Trade Receivables at year-end who may not be able to pay their accounts, established as a percentage estimate based on business experience.

Formula for Allowance for Doubtful Debts

$$\text{AFDD} = \% \times \text{Net Trade Receivable}$$

Doubtful debt account

A Statement of Profit or Loss account used to record the increase or decrease in the allowance for doubtful debts; it is not the same as the Allowance for doubtful debt account.

Accounting treatment for setting up or increasing the AFDD

The expense account for doubtful debt increases and the asset value effectively decreases as the allowance for doubtful debt increases.

Accounting treatment for a decrease in the AFDD

The income account for doubtful debt increases and the asset value effectively increases as the allowance for doubtful debt decreases.

Net Trade Receivable

The overall balance of Trade Receivables amount remaining after deducting confirmed bad debts.

Presentation of AFDD in the Statement of Financial Position

The total Allowance for doubtful debts is subtracted from the Trade Receivable balance to show the net amount in the current assets section.