9: Irrecoverable Debts and Allowances Flashcards
What is an Irrecoverable Debt and how is it accounted for?
A debt that the business believes will never be paid. Indications:
- bankruptcy of the customer
- disappearance of the customer
- refusal to pay.
We must remove this from receivables:
Dr Irrecoverable Debts Expense (P&L, as an administrative expense)
Cr Receivables (reduces TR on SFP)
How to account for ID that actually gets paid?
Dr Cash
Cr IDE
Do not post to receivables - cash has been paid!
IDE is a net figure, so will be final of everything taken out/back in etc.
What is an allowance and how is it accounted for?
A credit balance which is netted off against receivables in the SFP to give a net figure for receivables that are probably recoverable.
Dr IDE
Cr Allowance for Receivables
Don’t actually touch receivables!
How to calculate the allowance in the exam?
You will be provided with the probability of non-payment - use this to calculate.
Make sure Irrecoverable Debts are written off before any allowances are made for receivables.
What are the entries for increasing or decreasing an allowance?
Increase:
Dr IDE
Cr Allowance
Decrease:
Dr Allowance
Cr IDE
Make sure to recalculate how much is needed for the allowance at the end of each year
What are the steps for IDE and allowance questions?
- Bring forward T/R and allowance balances
- Write off irrecoverable debts
- Record any recovery of irrecoverable debts
- Close off receivables
- Calculate and add allowance
- Close off allowance and IDE accounts
What happens to an allowance if we get some money in during the year?
Absolutely nothing! That will be recalculated during the year end.
Subsequently, the receipt of payment would be:
Dr Cash
Cr Receivables
Writing off debt would be:
Dr IDE
Cr Receivables
That debt then being paid would be:
Dr Cash
Cr IDE
LEAVE ALLOWANCE ALONE until end of year.
