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【正文】 ill be unable to pay ? Such non payments are known as bad debts ? Bad debts are NOT deducted from sales ? Bad debts are deducted from trade receivables and added to administrative expenses in the ine statement ? Objective proof that a debt is bad is needed before any bad debt can be recognized 39 Doubtful Debts ? Trade receivables that may not be collected rather than bad debts which will definitely not pay ? An application of the prudence principle, being cautious and avoiding overoptimistic expectations ? Calculated as a % of trade receivables ? The full provision is deducted from trade receivables at each year end ? The change in the provision for doubtful debts is charged to the ine statement each year 40 Realisation ? Profits should not be anticipated until they have been earned through a sale. ? Application: – A sale needs to be backed by both an order and a transfer of goods or services to the customer. 41 Summary Accounting conventions are the rules that accountants work with in preparing financial statements. Going concern and accrual basis are the underlying assumptions. Other conventions include: dual aspect, materiality, money measurement, periodicity, prudence, realisation 42 。 . insurance, business rates, rent. To apply the accruals concept, we must ensure that the expense is charged in the ine statement for the correct year for which it is incurred. ? To adjust the expense from the cash amount PAID to the amount of expenses incurred adjust by: – Add to prepayments (appears in Statement of Financial Position, SOFP) – Reduce the expense a/c (appears in Ine Statement) 18 Example Rent and Rates ? Rent of $26,000 has been paid in cash throughout the year ? $2,000 of this amount actually applies to the first month of the next financial year This financial year Next year $24,000 $2,000 19 Mechanics ? Deduct $2,000 from rent expense for this year ? Create an asset (prepayment) of $2,000 to carry forward to next year ? (Next year, this asset will “expire” and be written off to the I/S as rent expense for that year) 20 Accrued Expenses ? Most expenses are recor

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