2. The Allowance for Receivables Flashcards
Define allowance for receivables.
If there is some doubt over a customer’s ability to pay, but the business still wishes to chase the debt, then a separate allowance can be made for these “doubtful receivables” (doubtful debts)
The allowance is a separate account which is offset against trade receivables, which are shown at the net amount.
What is the journal entry when an allowance for receivables is first made?
When an allowance for receivables is first made, it is charged as an expense (irrecoverable debts expense) in the statement of profit or loss. The other side of the double entry is a credit to a separate account in the statement of financial position, the allowance for receivables. The double entry is
Debit - Irrecoverable debts expense (statement of profit or loss - administrative expense)
Credit (Allowance for receivables (statement of financial position)
We do not touch the trade receivables account when making a allowance for doubtful debts
How do we adjust the receivable allowances for changes in our estimate of the level of doubtful debts? (i.e increase and decrease the allowance)
When an allowance for receivables already exists but is subsequently increased, the amount of the increase in allowance is debited to irrecoverable debts expense and credited to the allowance for receivables.
When an allowance for receivables already exists but is subsequently reduced, the amount of the decrease in allowance is credited to irrecoverable debts expense and debited to the allowance for receivables.
How is the allowance for receivables presented in the statement of financial position?
The allowance for receivables is not presented as a separate account in the statement of financial position. Instead, it is net off against trade receivables.
Outline how you can structure workings that can be used to answer questions in an exam regarding the value of irrecoverable debt expenses
