BAD DEBTS QUESTION

[Saadique M]

Hi there, I do not understand why bad debts is taken as a credit here..
Its on page D8.22

Q- little world completed the following transactions during the year ended 31st Dec 2007
Credit sales during the year : 53300
amount received from receivables - 56100
During the year, the total amount irrecoverable is 560
the opening balance of receivables was 8600
calculate the balance of receivables that will appear in the SOFP on 31 dec 07
(a) 5800
(b) 10840
(c) 5240
(d) 56100

answer is (c) 5240
heres the answer-

LITTLE WORLD
TRADE RECEIVABLES


DR - Balance B/D 8600 CR- Cash 56100
DR - Sales 53300 CR- Bad debts 560????

Balance C/F 5240

DR- 61900 CR - 61900


pls explain y bad debts is on the credit side...n sales on the debit??

[Dagabie]

RE: BAD DEBTS QUESTION


Saadique, please remember that there are rules governing accounting.

All Personal accounts e.g credit sales to companies and people, the rules say

DEBIT the customer with the value of goods he is RECEIVING from you.
Then
CREDIT the customer with cash or value that he GIVES to you in settlement of debits.

In otherwords, in the case of Personal accounts you ADD by debiting the account to increase the amount of credit sales you made to the customer. You also subtract by CREDITING the account of the customer to reduce his debit.

So you CREDIT BAD DEBTS to personal accounts to reduce or remove the amount that you cannot collect. That is what the rule is saying.

In case of nominal accounts - expenses and losses, incomes and revenue or gains.
Debit all expenses/losses and Credit all incomes/revenue/gains.

Ref. the golden rules in accounting.