CIE Accounting Paper-2: Specimen Questions 59 - 60 of 103
Passage
Fancy dresses show the following information as on 31.12. 2012.
Debtors- £164000, Bad debts during the year 2012 amounts to £4000, Bad debts for the year 2013 amounts to £2000. Provision for bad and doubtful debts in 2012 is £5000 and for the year 2013 is@5%. Discount allowed in 2012 is £2000 and for the year 2013 a provision for discount on debtors is created@2%.
Question number: 59 (2 of 5 Based on Passage) Show Passage
Describe in Detail
What are the adjustment entries that Fancy dresses would pass in their books of accounts?
Explanation
| DATE | PARTICULARS | LF | DEBIT AMT | CREDIT AMT |
| 31.12. 2012 | Profit & Loss A/c Dr |
| 2000 |
|
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| To New Bad debts A/c |
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| 2000 |
|
| (Being new bad debts accounted for |
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|
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|
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| 31.12. 2012 | Profit & Loss A/c Dr |
| 8100 |
|
|
| To Provision for doubtful debts A/c |
|
| 8100 |
|
| (Being provision for doubtful debts created) |
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|
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|
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| 31.12. 2012 | Profit & Loss A/c Dr |
| 3078 |
|
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| To provision for discount on Debtors |
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| 3078 |
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| (Being provision fordiscount on debtors created) |
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|
|
Question number: 60 (3 of 5 Based on Passage) Show Passage
Describe in Detail
What is the need for Fancy dresses to create a provision for bad and doubtful debts for the next accounting year in the current year itself?
Explanation
In the accounting system, the convention of conservatism is followed. According to this system, the business should foresee its loss in the future and make provisions for it, but however the future profits should not be accounted for. Similarly Fancy dresses as per the convention of conservatism provides for its doubtful debts for the next accounting year in the current year itself. Doubtful debts refer to those debts whose payments may or may not be received. As the goods are sold in the current year it is essential to make the provision also in the current year itself.