9 - Irrecoverable debts and allowances for receivables Flashcards
how is an irrecoverable debt recorded
must be removed from the statement of financial position and charged as an expense to the statement of profit or loss
DEBIT irrecoverable debt expense (SPL)
CREDIT trade receivables (SOFP)
what happens if an irrecoverable debt is suddenly paid
= because debt has already been written off it doesn’t impact SOFP so cash received cant offset it in usual way
instead, cash received is offset against irrecoverable debts expense:
DEBIT bank (SOFP)
CREDIT irrecoverable debt expense (SPL)
what is allowance for receivables
when doubtful debts occur = when invoices are in dispute or customers are in financial difficulty
will be expressed as a % of trade receivables = eg, ‘an allowance equivalent to 2% of trade receivables’
how is an allowance recorded
initial allowance charged as an EXPENSE in SPL for period allowance is created
DEBIT increase/decrease in allowance for receivables (SPL)
CREDIT allowance for receivables (SOFP)
(the debit entry could be to the ‘irrecoverable debt expense’ account but impact on SPL is same)
what is the procedure for adjusting the allowance for receivables
in subsequent years, adjustments may be needed to amount of allowance. the procedure is:
1. to identify new allowance required
2. compare it with opening balance on the allowance account
3. calculate the increase or decrease required
what happens if an allowance changes in size
if it exists but INCREASES, amount at which it is increased by is charged as an expense in SPL for period in which increased allowance is made :
–> DEBIT = increase/decrease in allowance for receivables (SPL)
–> CREDIT = allowance for receivables (SOFP)
if it exists but DECREASES, amount at which it is reduced by is credited back to SPL for period in which allowance is made:
–> DEBIT = allowance for receivables (SOFP)
–> CREDIT = increase/decrease in allowance for receivables (SPL)
how do you adjust the allowance for receivables
if a debt is no longer doubtful and definitely irrecoverable it should be removed from trade receivables
–> DEBIT = irrecoverable debt expense (SPL)
–> CREDIT = trade receivables (SOFP)
allowance for receivables will be adjusted when the period end accounts are prepared
what is the effect on spl if allowance changes
it doesnt matter whether the irrecoverable debt expense account and increase or decrease in allowance for receivables (SPL) account are combined or shown as two accounts;
EFFECT on spl is THE SAME
what is it called in the statement of profit or loss for both an increase or decrease of allowance
INCREASE = charge
DECREASE = credit
