Allowance for doubtful debts question

Mollypod88

Hi All,

I going through AP1 mocks in preparation for my exam and wondered if someone can help with the following question:

"The allowance for doubtful debts needs to be adjusted to 5% of the outstanding trade receivables. The SLCA has a balance of £16900 at the year end. The balance on the allowance for doubtful debts account is £750"

I know the answer is 95 but don't understand why?

Can anyone explain please?

Thank you

Emma

clegganator

5% of £16900 is £845.
There is £750 already in the doubtful debt account
£95 to reach the target!

Simples :-)

KaySarah

Agreed Clegganator :-)
The Allowance for doubtful debt is cumulative as doesn't "clear down" at FYE.

1. You calc New Provision (this Years)
2. Find out last year's (in last years TB on Credit side)
3. Find the difference - then (if its an Increase) ...
4. Deduct the NEW PROVISION from Trade Debtors in your Bal Sheet (Statement of Financial Provision)
and 5. charge the difference only to your PnL (Income Statement)

Note: if it's a reduction you then "add back the difference as Income in your PnL (Step 5 only)

Hope this helps and Good Luck with your exam :-)

Mollypod88

Thank you both! One more mark I'll hopefully get on the day!