Credit and Debt Management Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit and Debt Management flashcards as text
A company is evaluating whether to offer 30-day credit terms to a new customer. Using credit scoring, the customer scores 55 out of 100. The company's threshold for automatic approval is 65. What should the credit controller do?
Answer: Refer the application to a senior credit manager for further assessment
A score below the automatic approval threshold should be referred upward for human judgement. A senior credit manager can consider additional qualitative factors before making a final decision.
A debt has been identified as irrecoverable. The business uses the specific bad debt write-off method. Which accounting entry records the write-off of a £3,500 debt?
Answer: Dr Bad debt expense £3,500 / Cr Trade receivables £3,500
Writing off an irrecoverable debt removes it from trade receivables (Cr) and recognises the expense (Dr). The allowance account is only used for the irrecoverable debt provision, not for specific write-offs.
A company is considering using a debt collection agency to recover a £15,000 outstanding invoice. The agency charges 25% of the amount collected as its fee. The debtor is likely to pay £12,000 (partial payment). What will the company net?
Answer: £9,000
Net receipt = Amount collected − Agency fee = £12,000 − (25% × £12,000) = £12,000 − £3,000 = £9,000.
What is the key difference between a 'county court judgment' (CCJ) and 'bankruptcy proceedings' as debt recovery methods?
Answer: A CCJ is a court order to pay; bankruptcy seeks to have the debtor declared unable to pay and their assets distributed to creditors
A CCJ establishes and enforces a debt through court order. Bankruptcy (or insolvency for companies) is a collective process to distribute a debtor's assets among all creditors when they cannot pay their debts.
A credit manager receives a cheque from a customer marked 'payment in full and final settlement' for £8,000, but the actual debt outstanding is £12,000. What is the legal risk if the credit manager cashes the cheque?
Answer: The company may be bound by accord and satisfaction, losing the right to claim the remaining £4,000
Cashing a cheque marked 'payment in full and final settlement' may constitute accord and satisfaction — a binding agreement to accept less than the full amount, extinguishing the right to claim the balance.
Which of the following credit management policies will MOST effectively reduce the risk of bad debts from new customers?
Answer: Conducting thorough credit assessments, setting appropriate credit limits, and requiring trade references before granting credit
A structured credit assessment process — including credit checks, trade references, financial statement review, and appropriate credit limits — directly identifies and manages bad debt risk before it materialises.