8: Irrecoverable debts and allowances

Question 1

What are irrecoverable debts

Answer 1

Receivables that are not expected to be paid and are therefore “written off” e.g. cancelled in trade receivables ledger and charged against p/l.

Question 2

What is the double entry journal

Answer 2

Dr Irrecoverable debt expense (IDE)
Cr Trade receivables

Question 3

What is the entry in the rare situation an IDE is paid?

Answer 3

Dr cash
Cr IDE

Question 4

What do businesses do when they doubt customers ability to pay?

What is the allowance for receivables?

Answer 4

If there is a doubt over a customers ability to pay but business still wants to chase the debt then a separate allowance can be made for these doubtful receivables.

In practice, a business will use past experience to estimate probability of non-payment and then set an allowance for the total potential amounts that may not be recovered from customers.

Question 5

What is the double entry to increase and decrease an allowance?

Answer 5

Increase allowance:
Dr IDE
Cr Allowance for receivables

Decrease:
Cr Allowance for receivables
Dr IDE