14.2.1 How is impairment loss on trade receivables accounted for?

Question 1

What risk does a business which sell on credit face?

Answer 1

The risk of not being able to collect money from their debtors subsequently. Such a risk is known as credit risk.

Question 2

What is a ‘credit risk’?

Answer 2

The risk of not being able to collect money from a business’ debtors.

Question 3

What happens when a debtor fails to pay up?

Answer 3

The business suffers a loss as it cannot collect any money for the goods and services already provided to the debtor. The loss is known as Impairment Loss on Trade Receivables.

Question 4

What is Impairment Loss on Trade Receivables?

Answer 4

The loss that a business suffers when it cannot collect any money for the goods or services already provided to the debtor. It is an expense item reported in the income statement.

Question 5

Why is the business required to record the impairment loss on trade receivables expense in the SAME financial period as the business records the credit sales revenue?

Answer 5

To adhere to the matching concept.

Question 6

Define ‘impairment’.

Answer 6

Impairment means loss in the value of an asset.

Question 7

What does the business do at the end of each financial period?

Answer 7

It reviews how much it may not be able to collect from its debtors.

Question 8

When does the business recognise an impairment loss on trade receivables?

Answer 8

When there is objective evidence that a debt is unlikely to be collectible.

Question 9

Give some objective evidence that a debt is unlikely to be collectible.
(Review objectivity concept.)

Answer 9

1. The debt is overdue. Despite repeated reminders, the debtor has not paid up and gives numerous excuses for being late.
2. There have been market news or rumours that the debtor is having financial difficulties, and the debtor has been avoiding phone calls from the business.
3. After repeated reminders, the debtor finally sends in a cheque for payment but the cheque is dishonoured when deposited into the bank.
4. The business has not been able to contact the debtor. The debtor’s premises have been shut and phone lines have been cancelled.

Question 10

What is the journal entry for recording an impairment loss on trade receivables?

Answer 10

Dr Impairment Loss on Trade Receivables (increase expense)

Cr Allowance for impairment of trade receivables (increase contra-asset)