CSEC: May 2012 Question#2

No. 2(a) (i): Preparation of journal entry to record the writing off of bad debts:

No. 2(a) (ii): Journal entry for creation of Provision for doubtful debt as at 31 Dec, 2010:

Workings;

1. Calculation of balance of provision for doubtful debt as at 31 Dec, 2010:

               $28,320 x 10% = $2,832.​

No. 2(a) (iii): Drawing up the Provision for Doubtful Debt account for the two years, 1st January 2010 to 31st December 2011, showing the balances at the end of each year:
Workings;
Calculation of balance of provision for doubtful debt as at 31 Dec, 2011:
$25,000 x 10% = $2,500.
Therefore provision needs to be reduced by $332, (that is; $2,832-$2,500 = $332). To reduce the provision the following double entry needs to be carried out:
Debit – Provision for doubtful debt a/c - $332
        Credit – Income Statement - $332
To reduce the provision for doubtful debt account to $2,500.

No. 2(b): Adjustments to financial statements: 

• One reason why adjustments are made to financial statements is to adjust for any accruals or prepayments.
• One concept which guides adjustments to financial statements is the accruals or matching concept.
• The accruals or matching concept states that revenue must be recorded in the period that it is earned and expenses must be recorded in the period in which it was incurred as opposed to when cash was actually received or paid. As a result it is often necessary to make adjustments to the financial statements to account for any accrual or prepayments.

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