Chapter 9: Irrecoverable Debts and Allowances Flashcards
What is an irrecoverable debt? What are some indications as to an outstanding irrecoverable debt?
An irrecoverable debt is a debt which the business believes will never be paid
Indications that this is the case may include:
- The bankruptcy of the customer
- The disappearance of the customer
- An outright refusal to pay
How do we account for irrecoverable debts?
Remove irrecoverable debts from the accounts as they are no longer an asset.
How do we enter an irrecoverable debt to the account?
The amount of debt is expensed to the statement of profit or loss. The original sale remains in the accounts as it did actually take place.
The double entry required to achieve this is:
- Dr Irrecoverable debts expense
- Cr Receivables
Irrecoverable debts expense is shown as an administrative expense for a company
What do you do if subsequent to being written off as irrecoverable, a debt is paid?
The double entry to record this unexpected receipt of cash is:
- Dr Cash
- Cr Irrecoverable Debts Expense
The credit entry cannot be posted to the receivables account as the debt has already been taken out of the receivables balance
What happens to the irrecoverable debts expense account in the statement of profit or loss?
In the statement of profit or loss the irrecoverable debts expense account includes both debt write offs and the recovery of previously written off debts. The expense is therefore a net figure
Why should the receivables balance be reviewed each year end?
To assess any potential future amounts that will not be recovered from customers
How do you account for doubtful receivables?
Receivables which are considered doubtful are not removed from the receivables balance in case the customer does pay up.
BUT you must recognise the possible expense of not collecting the debt
- An allowance for receivables is therefore set up: This is a credit balance which is netted off against receivables in the statement of financial position to give a net figure for receivables that are probably recoverable
- The debit entry is to the irrecoverable debts account
When is the allowance for receivables calculated?
After all irrecoverable debts have been written off
To create an allowance for receivables, the double entry is…
Dr Irrecoverable debts expense (statement of profit or loss)
Cr Allowance for receivables (statement of financial position)
When is the allowance for receivables recalculated?
At each year end, similar to accruals
The movement on the allowance from the start to the end of the year then needs to be adjusted for
What is the double entry for an increase in the allowance for receivables?
Dr Irrecoverable debt expense
Cr Allowance for receivable
What is the double entry for a decrease in the allowance for receivables?
Dr Allowance for receivables
Cr Irrecoverable debt expense
How do you approach an adjustment to the allowance for receivables (6)?
- Insert brought forward balances for receivables (debit) and the allowance (credit)
- Write off irrecoverable debts
- Record the recovery of irrecoverable debts
- Close off the receivables account to obtain closing balance
- Calculate and post the required movement to the allowance for receivables
- Close allowance and expense accounts
Where do you charge any difference between the allowance at the start of the year and the allowance at the end of the year?
To the statement of profit or loss
What is the shortcut for calculating what figure should appear in the statement of profit or loss for the irrecoverable debts expense at year end?
Irrecoverable debts accumulated through the year + Movement in the receivables allowance
