3. Accounting for Irrecoverable Debts and the Allowance for Receivables Flashcards
How do irrecoverable debts affect the receivables ledger?
In the receivables ledger, the personal account of the customer whose debt is irrecoverable will also be adjusted to remove the balance that is not expected to be recovered.
In a computerised accounting system, when a debt is written off, the trade receivables balance and the customer’s personal account in the receivables ledger will be updated simultaneously.
What is the accounting treatment for the balance on the irrecoverable debts expense account at the end of a reporting period?
At the end of the reporting period, the balance on the irrecoverable debts expense account is transferred to the profit and loss ledger account (like all other expense accounts)
What journal entries are required to record an allowance for receivables?
Debit - Irrecoverable debts expense
Credit - Allowance for receivables
When preparing the statement of financial position, the credit balance on the allowance for receivables account is deducted from the balance on the trade receivables account (an asset account, therefore a debit balance).
What is the accounting treatment for allowance for receivables between periods?
What if the allowance has increased?
What if the allowance has decreased?
In subsequent reporting periods, the allowance for receivables will be adjusted as follows:
1. Carry down the new allowance required in the allowance for receivables account.
2. Calculate the charge or credit to the statement of profit or loss.
If the allowance has increased:
Debit - Irrecoverable debts expense
Credit - Allowance for receivables
With the amount of the increase.
If the allowance has decreased:
Debit - Allowance for receivables
Credit - Irrecoverable debts expense
With the amount of the decrease.
What is the maximum amount of a decrease in allowance for receivables?
An allowance cannot be a debit balance, so the maximum amount of any decrease will be to reduce the allowance to nil.
