Accounting: Irrecoverable receivables and Allowances for irrecoverable recievables

Question 1

What are Irrecoverable receivables?

Answer 1

Irrecoverable receivables arise when a trade receivable (credit customer) is unable (or unwilling) to pay the amount owed in respect of goods sold on credit.

Question 2

State 3 reasons why a debt may be irrecoverable?

Answer 2

1. the credit customer cannot be traced;
2. it is not worth taking the case to Court; or
3. the customer has been declared bankrupt (and the ‘final dividend’ in bankruptcy received

Question 3

What is the nature of an allowance ?

Answer 3

A allowance is the setting aside of income to meet a known or highly probable future liability or loss, the amount and/or timing of which cannot be ascertained exactly, and is thus an estimate.

Question 4

What is cconcepts is allowance a reflection of ?

Answer 4

It is an application of the prudence concept (providing for losses) and the matching concept (it recognises the loss against the revenue that generates it).

Question 5

Define specific allowance

Answer 5

A specific allowance in respect of particular trade receivable (credit customer) that has been identified as unlikely to pay their debts

Question 6

Define general allowance

Answer 6

A general allowance representing an estimate, usually computed as a percentage, of the trade receivables at the end of the accounting year who are unlikely to pay their debts.

Question 7

Name the techique used for a general allowance?

Answer 7

A general allowance for irrecoverable receivables involves the use of an estimation technique.

Question 8

Irrecoverable receivables written off…..

Answer 8

Irrecoverable receivables written off reduce trade receivables and create an expense in the statement of profit or loss.