Accounting Online Program Certification Practice Test

What entries are needed to account for the return of a cheque and adjustment of allowance for receivables at Meridi plc?

1. Debit Suspense £58, Credit Cash at bank £92

2. Debit Irrecoverable debts expense £9, Credit Cash at bank £58

3. Debit Suspense £58, Debit Allowance for receivables £25, Credit Cash at bank £92

4. Debit Allowance for receivables £25, Credit Irrecoverable debts £9

The correct answer is: Debit Suspense £58, Debit Allowance for receivables £25, Credit Cash at bank £92

The correct answer involves a debit to the suspense account and an adjustment to the allowance for receivables, reflecting the necessary accounting entries for the return of a cheque and the adjustment of allowance for receivables at Meridi plc. When a cheque is returned, it means that the cash initially recorded as received will need to be reversed. Debiting the suspense account indicates that there is an amount that cannot yet be assigned to a particular account, usually due to uncertainty regarding the transaction's proper categorization. This effectively reverses the cash entry, hence the credit to cash at bank is necessary to remove the funds that were recorded upon the receipt of the cheque. Furthermore, adjustments to the allowance for receivables are often necessary when a specific receivable is deemed uncollectible or insufficiently allowed for. Debiting the allowance for receivables recognizes that this allowance needs to be reduced due to the revised expectations of cash collection. In this case, it reflects an adjustment of £25 aimed at recognizing the anticipated loss from receivables. Combining these entries ensures that the financial statements accurately reflect both the cash position and the anticipated losses from doubtful receivables, keeping the accounts in balance and compliant with the accounting principles concerning receivables and cash flow