Allowance Flashcards
What is the nature of an allowance?
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.
- It’s an application of the prudence and matching concept.
What are the two types of allowances?
- Specific.
- General.
What is ‘specific’ allowance?
In respect of a particular trade receivable that’s been identified as unlikely to pay their debts.
What is ‘general’ allowance?
Representing an estimate, computed as a percentage, of trade receivables at the end of the accounting year who are unlikely to pay their debt.
How is the balance calculated?
The balance on the allowance for irrecoverable receivables account is deducted from the trade receivables in the statement of financial position.
What is the formula for ‘net realisable value’?
N.R.V = Trade receivable - provision.
