Audit

Running head: AUDIT
Audit
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1AUDIT
Table of Contents
Answer 1....................................................................................................................................2
Answer 6....................................................................................................................................3
Reference....................................................................................................................................5

2AUDIT
Answer 1
Allowance for doubtful debts is reduction of total amount of the accounts receivable
shown under the balance sheet and is immediately deducted from the amount of accounts
receivable. Allowance for the doubtful debts accounts represent the best estimate of
management on amount of the account receivable that is unrecoverable from the customers. It
is not necessary that it reflects the actual experience that may differ remarkably from the
expectation. However, if the actual experience varies the management shall make the
required adjustments for bringing the reserve more into the alignment with the actual results.
Bad debt can be written off though using the direct write off approach or through provision
method (Sigidov et al. 2016). Allowance for the bad debt is the valuation used for estimating
portion of the receivable that is uncollectible. As per the allowance method the organisation
shall pass adjusting entry at the end of each accounting period for loss amount that is
anticipated by it for the period of credit allowed to the customers. The adjustment increases
the amount of loss and it is a debit to the operating expenses account for bad debt expenses
and credit to contra asset. Entry for writing off particular uncollectible account will need
debit to the allowance for the doubtful account and credit to the accounts receivable. For
instance, if credit sale is for $ 80000, the entity will report $ 2400 as bad debt expense and
credit allowance for doubtful debt for same amount. It will lead to charging the expense in
the income statement as bad debt (Kieso, Weygandt and Warfield 2016) However, if the
company is not able to collect any amount till the year end the balance sheet will report $
80,000 as receivable and $ 2400 credit balance as allowance for doubtful debts. When it is
established that the amount will not be receivable $ 2400 will be write off from allowance
and the same amount will be deducted from receivables. Hence, inadequate write off of
allowance for doubtful debts will inflate the receivables that will misstate the financial