8 - Irrecoverable debts and allowances

Question 1

What are irrecoverable debts and that double entry? (It gets cleared to PNL)

Answer 1

They are receivables that are not expected to be paid. It is therefore “written off”.

Dr IDE (often part of admin expenses)
Cr Trade receivables

Question 2

What do you do if an old customer that has been written off ends up paying?

Answer 2

Dr cash
Cr irrecoverable debt expense

Question 3

What does allowance for receivables mean?

Answer 3

It represents the total potential amounts that may not be recovered from customers

Question 4

What is the double entry for an allowance increase/decrease on doubtful debts?

Answer 4

Increase:
Dr IDE (increase)
Cr Allowance for receivables

Decrease:
Dr Allowance for receivables
Cr Irrecoverable debt expense (decrease)

Question 5

IDE and allowance on SPL and SOFP?

Answer 5

SPL: You state the expense

SOFP: Your total receivables - allowance = net receivables

Question 6

How to calculate the IDE in the PNL statement

Answer 6

Irrecoverable debts written off x
Increase/decrease in allowance x/(x)
Old Irrecoverable debts that pay in the period (x)

Overall expense (dr) or other income (cr) x/(x)

Question 7

Summary of the key journals we need to remember?

Answer 7

Irrecoverable debt written off:
Dr IDE Cr Trade receivables

Cash received from amount previously written off as irrecoverable:
Dr Cash Cr IDE

Increase in allowance:
Dr IDE Cr Allowance

Decrease in allowance:
Dr allowance
Cr IDE