O Level Accounting Topical Past Paper Solution - 7707 Paper 11 May/June 2024 - Q17 Doubtul Debts

In this video, "O Level Accounting Topical Past Paper Solution - 7707 Paper 11 May/June 2024 - Q17 Irrecoverable & Doubtful Debts," I explore the concept of provision for doubtful debts and its role in maintaining accurate financial records. A trader maintains a provision for doubtful debts to account for amounts owed by credit customers that are unlikely to be received, ensuring trade receivables aren’t overstated. This solution clarifies the purpose and impact of bad debt entries, adjustments, and the provision for doubtful debts on the income statement. Here’s the detailed question for reference:
Question Statement:
Why does a trader maintain a provision for doubtful debts?
1. To ensure amounts owing to the business for which payment is unlikely to be received are regarded as an expense.
2. To ensure the trade receivables of the business are not overstated by providing for debts unlikely to be paid.
3. To identify credit customers who are not able to settle their accounts by the end of the financial year.
4. To provide for the amounts from credit customers unpaid at the end of the financial year.
Options:
A: 1 and 2
B: 1, 3, and 4
C: 2 and 3 only
D: 2, 3, and 4
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Provision for doubtful debts and the provision for doubtful debts account are essential for managing trade receivables. Bad debts represent irrecoverable amounts, and creating a provision for doubtful debts in the income statement helps in accurately estimating potential losses. When recording bad debt entries, an allowance is made to adjust for debts unlikely to be collected. The provision for bad debts adjustment reflects these estimates, often impacted by allowable discounts. Understanding provision for doubtful debts at the O’Level includes learning its journal entries, which help in maintaining financial accuracy for accounts.
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