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In accrual basis accounting, when is the provision for doubtful debts typically recorded?
- a)When a customer's payment is received.
- b)When an invoice is issued to a customer.
- c)At the end of the financial year.
- d)When an account becomes past due.
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
In accrual basis accounting, when is the provision for doubtful debts ...
In accrual basis accounting, the provision for doubtful debts is typically recorded when an invoice is issued to a customer. This provision is an important aspect of financial reporting as it helps to estimate and account for potential losses due to non-payment by customers.
Below are the reasons why the provision for doubtful debts is recorded when an invoice is issued to a customer:
Importance of Provision for Doubtful Debts:
- The provision for doubtful debts is a precautionary measure taken by businesses to anticipate potential losses from customers who may not be able to pay their debts in full or at all.
- It is necessary to record this provision to accurately reflect the financial position of the business and to comply with accounting principles and standards.
Recording at the Time of Invoice:
- When a business issues an invoice to a customer, it signifies that a sale has been made and the customer is obligated to make a payment.
- At this point, the business recognizes the revenue and also estimates the portion of this revenue that may not be collected due to the possibility of bad debts.
- By recording the provision for doubtful debts at the time of invoice, the business ensures that the estimated loss is accounted for in the same period as the revenue earned.
Estimating the Provision:
- The provision for doubtful debts is usually based on historical data, experience, and industry norms.
- Businesses analyze their past records of bad debts and calculate a percentage or ratio of doubtful debts to total sales or outstanding accounts receivable.
- This ratio is then applied to the current sales or outstanding receivables to estimate the provision.
Impact on Financial Statements:
- The provision for doubtful debts affects both the income statement and the balance sheet.
- On the income statement, it is recorded as an expense, reducing the net income and reflecting the potential loss from bad debts.
- On the balance sheet, it is recorded as a contra-asset account. It reduces the accounts receivable balance, which reflects the estimated amount that is not expected to be collected.
In conclusion, the provision for doubtful debts is recorded when an invoice is issued to a customer in accrual basis accounting. This allows businesses to estimate and account for potential losses from bad debts, ensuring accurate financial reporting and compliance with accounting principles.
Below are the reasons why the provision for doubtful debts is recorded when an invoice is issued to a customer:
Importance of Provision for Doubtful Debts:
- The provision for doubtful debts is a precautionary measure taken by businesses to anticipate potential losses from customers who may not be able to pay their debts in full or at all.
- It is necessary to record this provision to accurately reflect the financial position of the business and to comply with accounting principles and standards.
Recording at the Time of Invoice:
- When a business issues an invoice to a customer, it signifies that a sale has been made and the customer is obligated to make a payment.
- At this point, the business recognizes the revenue and also estimates the portion of this revenue that may not be collected due to the possibility of bad debts.
- By recording the provision for doubtful debts at the time of invoice, the business ensures that the estimated loss is accounted for in the same period as the revenue earned.
Estimating the Provision:
- The provision for doubtful debts is usually based on historical data, experience, and industry norms.
- Businesses analyze their past records of bad debts and calculate a percentage or ratio of doubtful debts to total sales or outstanding accounts receivable.
- This ratio is then applied to the current sales or outstanding receivables to estimate the provision.
Impact on Financial Statements:
- The provision for doubtful debts affects both the income statement and the balance sheet.
- On the income statement, it is recorded as an expense, reducing the net income and reflecting the potential loss from bad debts.
- On the balance sheet, it is recorded as a contra-asset account. It reduces the accounts receivable balance, which reflects the estimated amount that is not expected to be collected.
In conclusion, the provision for doubtful debts is recorded when an invoice is issued to a customer in accrual basis accounting. This allows businesses to estimate and account for potential losses from bad debts, ensuring accurate financial reporting and compliance with accounting principles.
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In accrual basis accounting, when is the provision for doubtful debts ...
The provision for doubtful debts is recorded when an invoice is issued to a customer. This practice ensures that an expense is recognized for potential bad debts as soon as revenue is recognized. It accelerates the recognition of bad debts into earlier reporting periods and helps in matching revenues with applicable expenses.
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In accrual basis accounting, when is the provision for doubtful debts typically recorded?a)When a customer's payment is received.b)When an invoice is issued to a customer.c)At the end of the financial year.d)When an account becomes past due.Correct answer is option 'B'. Can you explain this answer?
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