8: Irrecoverable debts and allowances Flashcards
What are irrecoverable debts
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.
What is the double entry journal
Dr Irrecoverable debt expense (IDE)
Cr Trade receivables
What is the entry in the rare situation an IDE is paid?
Dr cash
Cr IDE
What do businesses do when they doubt customers ability to pay?
What is the allowance for receivables?
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.
What is the double entry to increase and decrease an allowance?
Increase allowance:
Dr IDE
Cr Allowance for receivables
Decrease:
Cr Allowance for receivables
Dr IDE