Basically, debt can be regarded as an amount of money ‘borrowed’ by one party to another. Debts that will be paid by customers is good debts. This means the money, which has already been converted into products and services can be paid successfully by customers in a certain time period. Good debt can help companies generate income and fund their normal operations. If the accountant can be reasonably sure that the total shown in the statement of financial position represents good debts, the liquidity of capital and cash are guaranteed and facilitated.
Doubtful debts are neither bad nor good. Instead, it highlights the uncertainty whether the debt can be yielded (Black, 2013). As for the case of Newport Traders Limited, the total doubtful debts at the end of the financial year were
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Provided bad debts, the debt shown within the customer’ s Receivable Ledger account is written off and changed into a bad debts account within the General Ledger. At the close of the financial year, the amount of all bad debts account will be included as part of the expenses shown within the income statement (Black, 2013). In this case, £260 should be counted in expenses. Due to the cancellation of the debt, it will not be included in the trade receivables within the current assets on the statement of financial position. Conversely, with the hope that customers will pay, doubtful debts will still be included in the Receivable Ledger account. Depending on whether there are more or less doubtful debts to be catered for by the close of the financial period, provision will be adjusted up or down annually to cover all doubtful debts shown within the income statement (Black, 2013). Within the statement of financial position, closing balance of provision should be deducted from Trade Receivables. Thus, the £550 doubtful debts from Stafford Limited will be deducted from the Trade